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Full text of "Economic conditions in Italy, France, and the United Kingdom: report"

VM.Tr. -g/iu \-r.i \ 



95th Congress ) 

2d Session / 



COMMITTEE PRINT 



ECONOMIC CONDITIONS IN ITALY, 
FRANCE, AND THE mp0m^^ 

fee 



— I!: 

PRErAKED FOR t3^ 'T/ 



SUBCOMMITTEE OX EUROPE IC^lf^E 
CUDDLE EAST 



OF THE 



COMMITTEE Ols^ 
IXTERNATIOXAL RELATIONS 



BY THE 



FOREIGN AFFAIRS AND NATIONAL DEFENSE 

DIVISION, CONGRESSIONAL RESEARCH SERVICE, 

LIBRARY OF CONGRESS 




FEBRUARY 8, 1978 
Printed for the use of the Committee on International Relations 



20-866 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1978 



For sale by the Superintendent of Documents, U.S. Government Printing OflBce 
Washington, D.C. 20402 



COMMITTEE OX INTERNATIONAL RELATIONS 



CLEMENT J. ZABLOCKI, Wisconsin, Chairman 



L. H. FOUXTAIX, North Carolina 
DANTE B. FASCELL, Florida 
CHARLES C. DIGGS, Jr., Michigan 
ROBERT N. C. NIX. Pennsylvania 
DONALD M. ERASER. Minnesota 
BENJAMIN S. ROSENTHAL, New York 
LEE H. HAMILTON. Indiana 
LESTER L. WOLFF. New York 
JOXATHAX B. BINGHAM, Xew York 
GUS YATROX. Pennsylvania 
MICHAEL HARRIXGTOX, Massachusetts 
LEO J. RYAX. California 
CARDISS COLLIXS. Illinois 
STEPHEX J. SOLARZ. Xew York 
HELEX S. MEYXER, Xew Jersey 
DOX BOXKER, Washington 
GERRY E. STUDDS. Massachusetts 
AXDY IRELAND, Florida 
DOXALD J. PEASE. Ohio 
AXTHOXY C. BEILEXSON. California 
WYCHE FOWLER, Jr., Georgia 
E (KIKA) DE LA GARZA, Texas 
GEORGE E. DANIELSON, California 
JOHN J. CAVANAUGH. Nebraska 



WILLIAM S. BROOMFIELD. Michigan 
EDWARD J. DERWINSKL Illinois 
PAUL FINDLEY, Illinois 
JOHN H. BUCHANAN, JR., Alabama 
J. HERBERT BURKE. Florida 
CHARLES W. WHALEN, Jr., Ohio 
LARRY WINN, Jr., Kansas 
BENJAMIN A. GILMAN. New York 
TENXYSOX GUYER, Ohio 
ROBERT J. LAGOMARSINO, California 
WILLIAM F. GOODLING. Pennsylvania 
SHIRLEY N. PETTIS, California 



JOHx J, Brady. Jr., Chief of Staff 
George M. Ingram, i^taff Consultant 



Subcommittee on Eirope and the Middle E]ast 
LEE H. HAMILTON, Indiana, Chairman 



BEXJAMIX S. ROSEXTHAL. Xow York 
STEPHEX J. SOLARZ, Xew York 
DOXALD J. PEASE. Ohio 
GEORGE E. DAXIELSON, California 



PAIL FINDLEY. Illinois 
SHIRLEY N. PETTIS, California 



Michael H. Van DrsEN. Snhcommiltee Staff Director 

Alison L. P.renneh, Minority Staff ConttiiUant 

Ronald L. Soriano, Suhcommitter staff Axsociate 

David 1'. P.arton. Subcommittee Staff Ast<o(iate 

Sandra Dec kkr. Staff Atoii.stant 



(H) 



FOREWORD 



House of Hepresextativ-es, 

COMMIITEE ox IX'ITERXATIOX'AL ReLATIOXS, 

Washington, D.C., February 8, J 078. 

Tliis study was prepared by the Library of Congress at the request 
of the Subcommittee on Europe and the ^liddk^ East, chaired by Hon. 
T^e II. Hamilton, and has been submitted to the Connnittee on Inter- 
national Relations. 

The work, Avhicli examines the economies of Italy, France, and the 
Ignited Kinodom and analyzes some of the implications of recent eco- 
nomic developments on U.S. foreitrn policy, should be of benefit to 
members of the connnittee in trying to evaluate policy options toward 
three of our closest allies in Western Europe. 

The findino^s of the study are those of the Foreifrn Afi'airs and Na- 
tional Defense Division, Conofressional Research Service, Library of 
Congress, and do not necessarily reflect the views of the membership of 
the Committee on International Relations. 

( 'lk^iext J. Zablocki, Chairman. 
(Ill) 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/economicconditioOOIibr_0 



LETTER OF TRANSMITTAL 



House of Eepresextattv'es, 
Committee ox In n-:RXATioxAL Relations, 
Subcommittee ox Europe axd the ^Fiddle East. 

Washington, B.C., February 8, 1978. 
Hon. Clemext J. Zablocki, 

Clialrnmn, Committee on International Relations, House of Repre- 
sentatives. Washington, B.C. 

Dear IMr. Ciiatrmax : I enclose a study prepared for the Subcom- 
mittee on Europe and tlie Middle East by the Congressional Research 
Service of the Library of Congress. 

This report examines the economic conditions in Italy, France, and 
the United Kingdom. The political, military and economic streng-th 
of these three countries is of continuing concern to the L^nited States. 
This study undertakes an indepth investigation of many of the eco- 
nomic indicators and institutional factors Avhich are important to 
understand political and economic developments in these three Euro- 
pean states since World War II. 

The particular value of this endeavor is that it concentrates on the 
economic aspects of these states' post-war development, rather than 
on their military security, a subject which often takes disproportionate 
prominence in debates and discussion on security issues in Western 
Eui'ope. 

The report does not riiake any specific recommendations for U.S. 
foreign policy. However, it does outline a few hypothetical scenarios 
that might develop in certain circumstances and suggests poten- 
tial implications for American foreign policy of several possible 
developments. 

This study was prepared by Edward T. Lampson, specialist in Euro- 
pean a flairs, and Theoclor W. Galdi, analyst in international relations, 
Foreigii Affairs and National Dc^fense Division. Congressional Re- 
search Service, Library of Congress, and is being printed with the in- 
tent of contributing to the volume of knowledge on the economic 
situation in Europe. The analysis presented here is that of the Con- 
gressional Research Service and does not necessarily represent the 
views of the members of the Subcommittee on Europe and the Middle 
East. 

I believe this study will be useful to Members of Congress and all 
other persons interested in the situation in Western Europe and 
United States relations with Western Europe. The study's contents and 

(V) 



VI 

analysis may help all of us to understand better the complexities of 
some of the economic problems facino; Italy, France, and the Ignited 
Kingdom in particular, and the Western World in general, and the 
prospects for their recovery and ours. 

Lee H. Hamiltox, Chahin-cui, 
Suhcommittee on Europe and the Middle East. 



CONTENTS 



Page 

Foreword iii 

Letter of transmittal v 

I. Summary 1 

A. A brief survey of the three countries 2 

B. Individual characteristics 3 

1. Italy 3 

2. France 4 

3. United Kingdom 

C. Prospects 7 

D. Implications 8 

II, The recent economic past — 1972-77 10 

A. The commodity price boom of 1972-74 and continuing inflation. 10 

B. The 1973-74 OPEC oil price increases 14 

1. Inflationary effects 14 

2. Balance of payments 14 

3. Exchange rates 18 

C. The recession of 1974-75 18 

D. Foreign oflicial indebtedness 20 

1. Italy 20 

2. United Kingdom 23 

3. France 25 

E. The United Kingdom and North Sea oil 26 

III. Background statistical data and commentary 28 

A. Cautionary note 28 

B. Gross national product 30 

1. Italy 31 

2. France 31 

3. United Kingdom 32 

C. Inflation 33 

D. Population and employment 35 

1. Italy 36 

2. France 37 

3. United Kingdom 38 

E. Industrial activity 40 

1. Employment in manufacturing 40 

2. Labor disputes 41 

F. Balance of payments 42 

1. Italy 44 

2. France 48 

3. United Kingdom 51 

G. Exchange rates 52 

1. Italy 53 

2. France 53 

3. United Kingdom 54 

H. Import dependence 54 

1. Italy 56 

2. France 56 

3. United Kingdom 57 

IV. Country surveys 58 

A. Italy 58 

1. Postwar economic development 58 

2. Selected institutional factors 64 

(VU) 



VIII 

IV. Country surveys — Continued 
A. Italy — Continued 

2. Selected institutional factors — Continued Pa^e 

a. The managerial class 64 

b. The trade unions 64 

c. The civil service 66 

d. Governmental stability 68 

e. The economic philosophies of key political 

parties 69 

B. France 72 

1. Postwar economic development 72 

2. Selected institutional factors 78- 

a. The managerial class 78 

b. The trade unions , 79 

c. The civil service 80 

d. Governmental stability 81 

e. The economic philosophies of key political 

parties 83 

C. United Kingdom 85 

1. Postwar economic development 8."» 

2. Selected institutional factors 91 

a. The managerial class 91 

b. The trade unions '•>? 

c. The civil service 95 

d. Governmental stability 96 

e. The economic philosophies of key political 

parties 98 

V. Implications 101 

A. United Kingdom 101 

B. Italy 103 

C. France 104 

D. Repercussions in Europe 105 

E. Conclusion 106 



I. SUMMARY* 

The economic problems of Italy, France, and the United Kinfrdom 
are not unique; they are shared to a greater or lesser extent by most of 
the countries of AVestern Europe. The notable exception is West 
Germany.^ Even there a troublesome drop in economic growth and an 
increase in unemplovment have taken place. In tlie recent past other 
West European countries have experienced not only disappointing 
growth rates and rising unemployment but also high rates of inflation, 
price instability, and balance-of-pa3'nients deficits. 

The economies of Italy. France, and the United Kingdom have been 
selected for special attention because of their size and their importance 
to the economic, diplomatic, and defense interests of the United States. 
A brief mention of some facts regarding the interconnections between 
the three countries selected and the United States may serve to explain 
why their economic fortunes are of particular interest. 

U.S. direct investment in Western Europe at the end of 1976 was 
$.55.0 billion. Of this total $15.1 billion was in the United Kingdom, 
$5.9 billion in France, and $2.9 billion in Italy. 

Total U.S. trade turnover in Western Europe amounted to $55.8 bil- 
lion in 1976. Of this total $8.9 billion was with the United Kingdom, 
$5.9 billion with France, and $5.5 billion with Italy. 

Italy. France, and the United Kingdom are members of the key 
international institutions regidating international financial and 
monetary affairs: the International Monetary Fund (IMF), the In- 
ternational Bank for Reconstruction and Development (World Bank), 
and the Group of 10. In the I^IF the quota for the United Kinofdom 
is currently SDPv 2.8 billion, France. SDR 1.5 billion, and Italy,'SpR 
1.0 billion. Their combined voting strength, which is based on the size 
of their quotas, amounts to 18 percent of the total (as compared to 
22.9 percent currently for the United States). As important members 
of the European Community, which represents them in tariff' negotia- 
tions, they are in a position to play a crucial part in the current multi- 
lateral trade negotiations. All three countries have taken part in recent 
economic summit meetings held at Rambouillet, France, San Juan, 
Puerto Rico, and London, in 1975, 1976, and 1977 respectively to co- 
ordinate international economic policy. They are all active members 
of the Organization for Economic Cooperation and Development 
(OECD). The United Kingdom and France have close economic ties 
with their former colonies. France, in particular, has been a leader in 
initiating discussions between the industrial and less developed 
countries. 



♦This section was written primarily by Edward T. Lampson. specialist in European 
Affairs. 

1 West Germany's special status can be ascribed to many factors, such as sweeping 
postwar structural reorganization, the intense German determination to recover, outstanding 
technological and managerial talents, a skilled labor force, wage restraint based on deep 
fear of inflation, competent economic direction by the Government, and broadly shared 
views on economic policy. 

(1) 



In the defense field similar interconnections exist. The United 
Kingdom, a chief architect of NATO, maintains 58,000 men and IG 
air squadrons in Germany. Its armed forces, whose primary- purpose 
is to defend the United Kingdom against attack from Eastern Europe 
b}' participating in a joint XATO defense, total 339,150 ; its 1977-78 
defense budget is $10,880 million. The United Kingdom has an inde- 
jDendent nuclear strike force. It provides the United States with valu- 
able air and naval facilities, including port facilities for U.S. nuclear 
submarines at Holy Loch, Scotland. 

Although not a XATO member, the present French Government is 
coordinating French strategy more closely with that of NATO than 
previous Gaullist governments did. The French maintain 48,000 troops 
in Germany, have armed forces of 502,000, a 1977-78 defense budget of 
$11,720 million, and a nuclear force. 

Italy has armed forces of 330,000, and a 1977-78 defense budget of 
$4,040 million. Since Italian troops are not stationed in Germany, 
Italian forces will presumably take only a small part in the initial 
phase of an attack on the eastern front. However, the country is in a 
position to play a crucial role in the defense of the ^Mediterranean. 
NATO southern headquarters are in Naples. Italy furnishes the 
United States, through NATO, with important naval, air, and com- 
munications facilities. 

Aside from these specific economic and military connections, there 
are, of course, numerous diplomatic relationships with these three 
countries which are of great value to the United States. Indeed, the 
problems created by General de Gaulle in the past provide a small 
foretaste of the difficulties which would arise for the United States if 
the current cordial relationships were to deteriorate. 

A. A Brief Survey of the Three Countries Selected 

During the past 25 3'ears. there have been many striking similarities 
in the economic performances of France and Italy. In contrast, the 
development of the British economy has diverged in important re- 
spects from the French and Italian patterns. 

From 1955 t6 1970, the economies of France and Italy flourished. 
Their real economic growth rates averaged 5.1 percent for France and 
5.5 percent for Italy. The United Kingdom's average growth rate was 
much lower at 2.7 ])ercent. though that country's gross national prod- 
uct (GNP) did grow by over 40 percent in real terms during the 
period. All three kept inflation rates relatively low. Between 1955 and 
1970, inflation rates for the United Kingdom, France, and Italy 
averaged out to 3.2. 4.4, and 3.6 percent, respectively. ITnemployment 
was low in the United Kingdom and France despite substantial im- 
migration, whereas Italy experienced low recorded unemployment but 
significant emigration and large-scale uiideremj^loyment. AVith the ex- 
ception of 2 or 3 bad years, the external accounts of both Italv and 
Franee were in sin-])lns. The United Kingdom, on the other hand, had 
repeated balance of payments ci-ises and a major devaluation. 

Beginning in the early 1970's, all three countries began to liave 
serious economic difficulties. Their roots lay in the intei'relationship 
of three eeonomic phenomena : The 1072-74 commodity price boom, the 



1973-74 OPEC oil price increase, and tlie 1974-75 worldwide reces- 
sion. As a result of tliese forces, all three countries in varyin^r de<^rees 
experienced inflation, stagnation of economic orowtli, balance of pay- 
ments deficits, high unemployment, and growing foreign indebtedness. 

B. IxDViDUAL Characteristics 

The way in which these problems took form and the methods by 
which governinents attempted to deal with them can best be under- 
stood by a closer look at the characteristics of the individual countries 
concerned. 

1. ITALY 

As a relative newcomer to modern industrial development. Italy 
was able, at the end of World AVar II. to take off into a period of 
economic growth which continued without serious interi'uption until 
the early seventies. The remarkable success of the economy was shown 
by the fact that, before 1973, the current account of Italy's balance of 
payments was in surplus ever}^ year except 1955, 1956, and 1963. Dur- 
ing this period, the lira remained remarkably stahle. 

In the 1970's, the Italian economy encountered serious difficulties, 
largely caused by developments beyond its control. These develop- 
ments are described in detail in the next section of this study. In the 
case of Italy, they produced a runaway inflation, rising unemploy- 
ment, and heavy indebtedness to foreign private and public financial 
institutions. 

The character of the Italian economy made it especially vulnerable 
to outside pressure. The country is highly dependent on imports. It 
is almost entirely lacking in coal, iron ore, timber, and petroleum and, 
since nearly 50 percent of its industrial output is exported, changes in 
world demand can cause serious domestic problems. In addition, the 
economic dualism of the country has been a severe handicap. In south- 
ern Itah% a part of the backward Kingdom of the Two Sicilies before 
Italian imification, and in the nonindustrialized sections of northern 
Italy, an underpaid and often underemployed portion of the popula- 
tion Ha'cs in primitive conditions, often at subsistence levels. The pres- 
ence of this unproductive segment represents a burden on the economy 
as a whole. 

As a consequence of the striking differences lietween the backward 
parts of the country and the highly developed cities and regions, a 
mass migration has taken place in the last 30 years from south to north 
and from farm to city. This migration produced many serious social 
and political problems. Chief among them have been poor living 
and workiuiT conditions in the slums that grew up around the large 
industi'ial cities. These conditions led to widespread unrest w^ith which 
Italian Governments failed to deal effectively. 

As the skilled labor market tightened in the sixties and the trade 
unions' bargaining position strengthened, labor leaders became more 
aggressive in pressing their claims. Conse(|uently, widespread strikes — 
particularly in 1962-63 and 1968-69 — forced private and state 
factories to raise wages well above productivity growth rates. This 
made Italian exports less competitive, initially because of higher prices 
charged foreign buyers, and later by reducing the investments factory 
owners should have made to modernize their iDlant and equipment. 



Another factor in Italian economic development has been the inad- 
equacy of recent Italian Governments in dealincr with pressincr eco- 
nomic and social problems. In 31 years, Italy has had 39 govern- 
ments, all presided over by Christian Democratic (DC) Prime ^linis- 
ters. The DC Party has slowly lost its popuhirity because it has failed 
to revitalize its leadership, overcome its reputation for inefficiency and 
corruption, deal with the country's economic problems, or carry out 
social reforms popular with the electorate. 

As a result of the last parliamentary election of June 1976, which 
reduced the numl)er of DC seats and increased those of the Commu- 
nists, a DC government could not be formed without Communist sup- 
port. For 18 months the DC aovernment of Giulio Andreotti functioned 
on the basis of an ao-reement between the Prime ^Minister and Com- 
munist leader Berlinguer providing for close consultation on legislative 
prograins but excluding Connuunists from executive posts. During 
this period the Italian Conimimist Part}^ (r*CI) acted as a stabilizing 
force, urging fiscal restraint, moderation in wage demands, remuicia- 
tion of further nationalization, and reform of the bureaucracy. Then 
in December 1977 the Communists withdrew their support and called 
for the formation of an emergency national government with Com- 
munist participation. The DC Party refused to form a coalition with 
Communist members. Conse(iuently the .Vndreotti government fell on 
January 16. 

Italy's most serious current economic problems, which have forced 
the Government to borrow heavily from the IMF and the European 
Community (EC), have been chiefly caused by the drop in foreign de- 
mand for Italian exports owing to the 1974—75 world recession and the 
rise of commodity prices, especially oil. Italy, which imports about 75 
percent of its energy requirements, is the most de[)endent of all major 
West European countries upon the OPEC countries. Its need for 
increased exports to provide the foreign exchange to pay for its im- 
ports will be met only when the major industrial nations are 
prospering. 

A serious current problem for the Italian economy is inflation. High 
import de])endence makes Italian prices peculiarly sensitive to in- 
creases in foreign commodity ])rices. The wage explosions which took 
place in the sixties and seventies added to inflationary pressure. This 
is particularly so because of Italian workmen's j)ropensity to spend 
rather than to save. The consequent increase in imports and fall in 
expoits added to Italy's severe balance-of-payments problems, which 
only ]iow are being corrected. 

In recent months the Andreotti government made significant 
progress in balancing its external accounts. Budgetary expemlitures 
have been cut back, the management of taxes and expenditures has 
been more effective and inflation has been reduced. But Italy's extreme 
import dependence and its unbalanced economy based on economic and 
regional dualism render it tlie most volatile oip the three countries un- 
der review in short-run economic terms. Up to the present the Govern- 
ment apparently has not drawn much on its 1977 loans but, if the 
woild economy does not recover, it may have to make additional 
withdrawals. Moreover, the resigfiation of tlie Andi'eotti govei'iunent 
fiiitbcr coniplicMtes speculation regarding Italv's economic future. 



2. FRANCE 



Since World War IT France lias followed a steadier economic course 
than either Britain or Italy. France has enjoyed certain characteristics 
which have aided its performance. It is less clependent on imports than 
Britain and Italy. It is equipped with a cadre of well trained and 
experienced en<rineers and otlier technical experts. It benefits from 
an unusually comprehensive system of education. It possesses a com- 
petent corps of hiii'her civil servants. Since the forties, its birth rate 
hns risen. An intan<rible positive factor is a widely held desire to shake 
off the letharay which had seized the country in the thirties. 

French economic expansion hit its stride in the eai'ly fifties and a 
ofrowth rate of over 5 percent was maintained for more than 20 years. 
In the authoritarian but stable atmosi)hei'e of the De Gaulle presidency 
(1958-69), French industry gained in self-confidence, and the French 
balance of payments became, and i-emained, strong. The Gaullist gov- 
ernment encouraged exports by a IG-percent de\aluation in 1959. (A 
second devaluation occurred in 1969 following the economic tremors 
which resulted from the demonstrations of ^lay-June 1968.) The 
French Government reacted in a composed fashion to a balance-of- 
payments crisis in 1963 by enforcing an austerity program which 
stabilized the economy. The program was then relaxed early enough 
to prevent French industry from being brought to the kind of abrupt 
slowdown which had so often occurred in the Ignited Kingdom. 

France, however, did not escape the problems which affected the 
rest of Euro|)e in the seventies. The cotmtry wns unable to hold to the 
average annual inflation rate of 4.4 percent which it had maintained 
in the previous decade. Wage increases and the rise of international 
commodity prices, especially oil (which now accounts for roughly 20 
percent of French imports, by value), forced the inflation rate up to 
13 percent a year by 1974. Strenuous efforts to negotiate foreign con- 
tracts for the sale of arms, industrial equipment, and nuclear facilities 
failed to bring French external accounts into balance. The 1974-75 
world recession was reflected in France by a drop in exports and a 
contraction of production. As a result, the rate of tmemployment rose, 
reaching a high of 1.2 million in August 1977. This unemployment is 
a serious political problem for a government facing parliamentary 
elections in !March 1978. 

The economic development of France brought with it many social 
and political problems. As in Italy, there was a large-scale migration 
from farm to city which produced industrial slums and bad working 
conditions. 

A major protest occurred in May-June 1968. It was led by universit}^ 
students in a sj^ontaneous uprising which was joined later by French 
labor unions. As a result, the Fiench Government and private em- 
ployers increased wages and introduced significant improvements in 
working conditions. The disturbances of 1968 illustrated in deep-seated 
dissatisfaction in France with the distribtition of the gains from 
French economic development. 

A sign of widespread discontent in France has been the increase 
of the strength of the Socialist and Comnmnist Parties in recent years. 



Indications are that the parliamentary elections of March 1978 will be 
close. 

If the Union of the Left (the Socialists. Communists, and Left 
Kadicals) win the election, there may be sweeping chancres in the 
French economic system. In their electoral manifestos the Socialists, 
who are almost twice as strong in electoral support as the Communists, 
are calling for limited nationalization, while the Communists desire 
more extensive nationalization. The inability of either to win a major- 
ity in an election without the other gives each party strong reasons for 
compromise. But at this stage of a bitter struggle which is underway 
it is not certain that compromise will be achieved. If it is. and the 
Union of the Left wins the election, the outcome in terms of govern- 
ment policy is difficult to predict. AVhat will be the relationship of elec- 
toral platforms to governmental action ? To what extent Avould the So- 
cialists be forced to accept Communist policies? To what extent will 
tliey adjust their electoral promises to the exigencies of government? 

3. rxiTED kixgdo:m 

Since the end of the Second World War, the United Kingdom has 
fallen further and further behind its continental competitors in many 
important economic areas. Its share of world exports of manufactured 
goods dropped from 20.4 percent in 1954 to 8.8 percent in 1975. British 
manufacturing output lagged far behind that of other OECD mem- 
bers. The country went through several balance-of-payments crises and 
a major devaluation. By 1975, its annual rate of inflation had risen to 
24.2 percent and in 1976 alone the pound depreciated by 17.6 percent 
against the dollar. In early 1977, the British Government was forced 
to arrange to borrow $8.2 billion from the International Monetary 
Fund (IMF) the Bank for International Settlement (BIS), and the 
Eurodollar market. 

Many factors help explain this poor record. Some observers attribute 
the country's ]:»erformance to the long-term effects of World War I and 
World War II. In Germany, France, and Italy. World War II and its 
consequences displaced out-of-date habits and old or inefficient plant 
and equipment, opening the way for vigorous modernization muler 
fresh leadership. But in Britain many of the old ways remained 
untouched. 

Second, British industry has been starved of investment. An impor- 
tant cause was the stop-go economic policy resorted to by postwar 
British governments more frequently than by other European govern- 
ments, ^lotivated largely by a detei-mination to protect the value of 
the pound, British governments applied the brakes to economic expan- 
sion whenever faced with a serious balance-of-payments deficit. The 
uncertainties in business prospects which resulted encouraged many 
British investors to place their money abroad rather than at home. 

Third, the structure of the British economy developed along lines 
which made it less able to compete successfully in export markets. In 
the past ^0 years there has l)een a shift from manufacturing to service 
employment. So long as the service sector is able to contribute enough 
to meet the country's needs for foreign exchange, the shift need not 
have a signifi<'ant impact on the United Kingdom's international 



economic standing. Rut while the increase in invisi})le eai-ninnfs from 
tourism, bankinir, insurance, et cetera, lias been a step in the ri<rht di- 
rection, it has not ^one nearly far enou<rh to compensate for the reduc- 
tion in British exports of manufactured <>-oods. 

Since the end of AVorld War II the public sector has been ex- 
panded at the expense of the private sector. In 194G the coal industry 
and the Bank of Elnofland were naticmalized. Throu<rhout the follow- 
ino: years the electricity, nas. steel. acT'ospace, aircraft industries, the 
shipyards, and part of the automobile industry have been nationalized 
or brought under state control and tlie social services ex))an(led. The 
profit record of nationalized industries has not been ^ood, partly be- 
cause some of them were deliberately subsidized to keep prices down 
and partly because some were taken over primarily to prevent an 
increase in unemployment. Government support for uneconomic enter- 
prises is a practice which the present Lalwur or^vernment is now 
attemptinor to curtail — but the pressures vrhich can be brouofht to bear 
to protect jobs are often hard to resist. 

British labor is far less productive than continental labor. A recent 
study has shown that in the autom.obile industry a British worker 
equipped with the same tools produces onlv half as much per shift as 
his European counterparts. Similar situations reportedly exist in the 
chemical industry and generally across the lx)ard. 

The anta.^'onism Ix^woen employers and workmen built into a 
hvQ-lily stratified class structure has not been eradicated in the United 
Kingdom to the same extent as in postwar Oerp^nny. In addition, the 
structure of British labor unions contributes to industrial inefficiency. 
(There are over 400 British unions.) In recent years labor shop stew- 
ards have become more radicalized. As inflation and unemployment 
increased labor leaders became more air.srressive. The strikes by the coal 
miners' union brought down the Conservative government in 1974. 

Additional problems have l)een created by the weakeninor of the two- 
party system which has dominated British political life since the iTth 
century. Today neither the Conservative nor the Labour Party can 
command a parliamentary maioritv. The Labour Party now holds 
office as a minority government dependent on the support of the 
Liberals. Consenuentlv. the government has been deprived of much of 
its power to initiate policy. 

There are indications of improvement in the Britisli economic situa- 
tion. The United Kimrdom has irone far toward balaneinor its external 
accounts and reseiwes have increased dramatically since the beginning: 
of 1977. The pound has appreciated significantly since October 1977. 
The rate of inflation has been reduced to 15 percent and some prog- 
ress has been made in directing investment into productive chan- 
nels. The country has increased its agricultural production so that it 
is less dependent on the importation of foodstuffs. And most important 
of all, North Sea oil fields are beginning to supply the United Kingdom 
with petroleum products in significant amounts. As this supply in- 
creases the country will be less and less deoendent on OPEC countries, 
and eventually oil exports will help its balance of payments. 

But despite these encouraging signs there is a brittleness about the 
present British situation. There is still veiy slow real gi^owth, and 
high unemployment persists. One senses the strains and hesitations of 



unresolved relationships between classes and uncompleted adjustments 
to new circumstances. Unless these tensions are released, the United 
Kingdom may not regain its momentum in spite of the boon from 
North Sea oil. 

C. Prospects 

The omens for the future are mixed. In 1977 both the United 
Kingdom and Italy improved their financial positions to a remarkable 
degree; they introduced effective programs to bring their external 
accounts into balance, reduced inflation, and cut government budgets. 
But they have not gone far toward solving their underlying structural 
and social problems. North Sea oil should give the United Kingdom a 
breathing spell of a decade or so to overhaul its economy. But Italy 
must find its equivalent for Xoilh Sea oil in efficiency, ingenuity, 
quality, and salesmanship. Both countries face serious dangers : Wage 
explosions could price their exports out of foreign markets and set off 
a new round of inflation ; continued unemployment — especially among 
educated youth — could lead to disturbing political developments. 

France has a steadier economy than the other two. Its problems 
are as much political as economic. Its future may be more influenced 
by the outcome of the March 1978 election than by purely economic 
factors because a victory of the Union of the Left might swing French 
economic policy far to the left. 

Finally, it mu?t be emphasized that the economic futures of all three 
countries will also depend on circumstances largely beyond their con- 
trol. They do not belong to a closed European system but are dependent 
on a wide network of international transactions. In a depressed world 
economy in which they cannot earn enough foreign exchange to pay 
for their essential imports it will be difficult .for them to prosper. 

D. Implications 

In the last vSection of this report a series of hypothetical scenarios 
is presented to point out the implications for the Ignited States of 
economic developments in the United Kingdom, France, and Italy. 
In the roughest way these scenarios may be divided into two sets of 
hypotheses: (1) things iro well economically, and (2) things go badly 
economically. It is in the second set tliat serious problems may arise 
that might require remedial action by the United States. To speculate 
that the economic situation in any of these countries deteriorates is 
not to assume that the worst will actually happen. On the contrary, 
as we have seen, there are numerous signs that these countries may be 
able to deal with their difficulties, thus eliminating problems for the 
United States. But it is by postulating the worst case situations that 
one cjin put into shaipest focus what the problems might be and what 
remedial steps might be needed. Fui*thermore, such an approach is in 
line with the advice of Dean Acheson : "Prepare for the worst and hope 
for the best.'' 

No attempt is made here to summarize the scenarios which are devel- 
oped briefly in section V. But tho consecniences which might follow 
from the worst-case hypotheses outlined there, however far from 
reality, are listed in the following paragraphs : 



9 

1. Establisliinont of a sic<i-e oconomy by ouv or luoro of tlio, 
countries, involvin<i: bi<^h]y protectionist actions, such as barrin*^ 
imports, blocking currencies and assets, and instituting exchan<^e 
controls. (Such steps could set in motion a series of retaliatory 
actions by other countries.) ; 

2. An unwillinpie.-s on the part of hard-pressed countries to 
cooperate constructively in international linancial and trade or- 
ganizations ; 

3. A weakening of the European Community ; 

4. Abandonment of United States- Kujopeaii plans foi- working 
out programs designed to reconcile North-South confrontations; 

5. Enhancement of chances that the Communist Parties in 
France or Italy might gain full control of the government (In 
the case of the United Kingdom the left wing of the Ivalmur 
Party or the right wing of the Conservative Party might be in 
a position to set policy with little restraint from moderates.) : 

6. Defense budget cuts by one or more of the three countries so 
deep as to jeopardize their effective ^participation in XATO; 

7. A\'ithdrawal of the British Army of the Rhine from the Euro- 
pean Continent ; 

8. The gradual development of a XATO, with less active UK 
participation, into what would become primarily a United States- 
West German militai-y alliance ; 

9. Loss by the U.S. of the use of bases in Italy ; and 

10. The growth of European neutralism. 

If faced with a serious deterioration of the economic situation of 
any of the three countries, the U.S. Government might need to consider 
some of the following types of action : 

1. Examining in advance the range of measures available to 
provide additional fiiumcial assistance, if needed, including actions 
by the Bank for International Settlements, the International 
Monetary Fund, the European Community, and central banks; 

2. Contributing financial assistance in some special circumstance, 
either bilaterally or through some international financial agency, 
such as the I^IF. (For example, if there should be a serious flight 
of capital from France or Italy because of Communist entry into 
the Government it might be advisable to help arrange temporary 
financial relief in order to avoid an economic collapse which would 
strengthen extremist forces in either of these countries.) ; 

3. Pressing for reflation in balance-of-payment surplus coun- 
tries within the limits of practical politics and for cautious 
reflation by other countries as advocated at the September 1977 
IMF meeting; 

4. Avoiding actions in the United States likely to encourage 
protectionism in hard-pressed countries ; and 

5. Encoui'agiiig cooperative programs, such as enerav conserva- 
tion, through the OECD. 



20-866—77- 



II. THE RECENT ECONOMIC PAST 1972-77* 

The current economic situation in Italy. France and Britain is to a 
large degree the result of the interplay of three workhvide economic 
phenomena experienced in the immediate past. These are the com- 
modity price boom of 197:2-74: and the resultant continuing inflation, 
the 1973-74 OPEC oil price increase, and the severe recession of 1974— 
75. While the incidence of each of these phenomena varied consider- 
ably among the three countries, the short- and long-term effects have 
had, and continue to have, a very significant influence on their current 
economic performance. 

A. The Commodity Price Boo:\i of 1972-74 and Coxtixuing 

Inflation 

Because of their dependence on significant imports of food, raw ma- 
terials, and semiprocessed manufactures, Italy. France, and the United 
Kingdom are particularly sensitive to fluctuations in commodity 
prices. Beginning in mid-197*J, world commodity prices, led by food 
prices, began to increase dramatically. This increase continued un- 
interrupted until the end of 1974, when falling demand for industrial 
commodities and adequate harvests in food producing areas forced 
prices down. However, this \xx>m in connnodity prices, combined with 
oil price increases in the latter part of the period triggered, then 
fed an inflation that is still seriousU^ affecting the three subjects of this 
study. 

In an excellent analysis by the OECD,^ thiee ])liases of this infla- 
tionary period were distinguished. The first phase, from mid-1972 to 
about October 1973, was characterized by a rapid rise in the price of 
primary commodities. In the case of food, the price increases were 
due to supply deficiencies. Grain harvests were poor in several areas, 
and oil seed substitutes far below expectations. In the case of industrial 
raw materials, the price inci^eases were due to demand created by a 
period of substantial growth of production in tlie dexeloped countries 
which had begun in 1972. Unlike food, these pressures on prices wer(» 
from the demand side. However, by October 1973, it appeared that the 
supply/demand situation in both industrial raw materials and food 
was coming into l>alance. Industrial connnodity prices had l)een stable 
for 3 months, and spot food prices had fallen some 10 percent. 

The beginning of the second phase was marked by the October 1973 
Arab- Israeli war whicli added a new element of uncertainty to com- 
modity markets. Oil prices were initially increased ;">() percent, then 
doubh'd. Spot connnodity prices began to increase again in resonance. 

•This soctlon was written by Theodor W. Galdl, analyst in International Relations. 
1 OECI) Outlook, vol. 15. 1!»74. 

(10) 



11 

These spot increases combined with low carryover levels of certain 
commodities to tri<rtrer a sharj) speculative sur<;e in prices which were 
not supported by the underl\in<2: level of final demand. Historically, 
industrial raw materials prices had followed the trend of output in 
OECI) countries. In this instance, conti'ary to ])recedent, price increases 
accelerated while out])ut actually declined. P)y May 1074. industrial 
IH'oduction in the major OECI) counti-ies, whi<'h had been declinin^^ 
^rradually since the end of lOT-'J, be^an to fall sharply. Industrial pro- 
duction in Italy, France, and the United Kino:dom was sli<^htly out of 
phase wdth the major OECD economies in that it continued to increase 
irregularly until June 1974, then began to fall sharply in July. Tliis 
decline in' production was matched by a sharp fall in industrial com- 
modity pric?s which continued until January of 1975. 

During the last half of V-)T-), the third phase of the inflationary 
cycle began. Whereas the inflation due to increases in commodity prices 
liad been caused essentially by factors outside of individual economies, 
beginning in mid-1973 — some 12-18 months after the start of the com- 
modity price boom — wage earners in OECD countries began to press 
for — and get — higher pay in an attempt to restore their preexisting 
levels of real income. Wage increases in Italy were particularly high. 
At this juncture, the externally generated inflation from the com- 
modity price boom began to be augmented — and for a period super- 
seded — by internally caused inflation resulting froni the granting of 
large wage increases. Thus, when industrial commodity prices broke 
in Slay 1974, the rate of inflation for the OECD area did not decline. 
In fact, for Italy and the United Kingdom the rate of inflation acceler- 
ated in 1974 because of the effects of wage increases, the continued in- 
crease in food ])rices. and the impact of the new — and larger — oil price 
increases. 

Mainly as a reflection of the weak demand situation in 1075 — the 
recession having bottomed out in midyear for most OECD countries — 
industrial raw materials prices remained stable throughout the year. 
Because of good harvests, food prices fell steadily from 1974 peaks. 
However, following the plateau reached in 1975, commodity prices 
again accelerated in 1976 and into 1977. While industrial raw material 
prices increased somewhat, the main agent of inflation in commodity 
prices was again food. In 1976-77 food prices reached peaks CA'en 
higher than during the 1974 food supply squeeze. 



12 



INDEX OF NON-OIL COMMODITY PRICES 
IN $ TERMS . 



1970 
^ 100 



300 


- 














1 
/ 


_ 


260 


- 








Food 








- 




- 








\ 




i 


> 


- 


220 


- 








•!*^\. .^^ 


'. 


Jj 


/ 


- 


180 


- 








1^^ 


\V'" 


Ir'^^^ 




"" 


140 


- 






/ / 




1 




."x 


- 


ICO 


- 

* \ 
\ 




^ 






1 

Ail exp 


DftS 




" 


^- -^ 




\ 








- 


60 


1 1 1 


1 1 1 


1 1 1 


Minerals and metals 
1 II 1 I I I Mi 


I 1 1 


1 1 


J_ 



1970 
100 



300 



260 



220 



ISO 



140 



100 



- 60 



1970 



1971 1972 1973 1974 1975 1976 1977 



Source : OKCI) Economic Outlook, vol. 21, July 11)77. p. ."31. 

As the chart above indicatos, witli 1070 as an index of 100, minerals 
and metals prices peaked at around 150 in May 1974, then fell to a 
trouo^h around 130 in mid-1975 and remained there for the rest of tlie 
year. Throu<:^h 1976 and into 1977, they rose crradually again to a peak 
over 150 in early 1977. Food prices, on the other hand, rose to an index 
level of 220 in 1974, and only declined to slightly below 180 in the 1975 
recession. Throughout 197G and into early 1977, tliey rose rapidly, 
reaching an index level of 320 before falling back somewhat. 

Thus, commodity prices began to rise in 1972; peaked in 1974 but 
did not fall back to earlier levels during tlieir 1975 trough. From this 
elevated starting point they increased tlnoughout 1976 and into the 
first quarter of 1977. Throughout the entire G-year period from 1972 



13 

to 1977, incrcasos in food pricos wore always mucli o:rcatcr than those 
for minerals and metals. This last fact is important since, for all three 
comitries, food prices comprise an extremely large component of the 
consumer price index (CPI). For Italy, food is 43 percent of the CPI ; 
for for Fi'ance. 4(1 [)erceiit; and for the riiitcd Kingdom 41 pei-ceiit.- 
OECD data indicate that on a weighted basis, food prices contributed 
between 40 and 50 percent of the rise in consumer prices for the tliree 
countries in the period 1972 to March 1974. 

In addition to the direct inflationary effects of increases in food 
and commodity prices, both Italy and the United Kingdom have been 
doubl}' affected as a result of the domestic price impact of the deprecia- 
tion of their currencies. Thus when import prices for commodities 
are quoted in dollars, and the tw^o currencies have depreciated relative 
to the dollar, the amount of the depreciation is added to the already 
increasing price of the commodity. This problem w^as serious for both 
countries from 1973 on, but particularly so in 1975 and 1976 when 
both currencies depreciated significantly. By the same token, the recent 
revaluation of the pound has helped decrease the rate of inflation in 
the United Kingdom. 

Data on the growth of houi'ly earnings in manufacturing provide 
one indicator of the contribution of wage increases to overall inflation. 
The table below shows the year-to-year percentage changes in nominal 
hourly earnings in manufacturing for Italy, France and the United 
Kingdom from 1972 to 1977 compared with increases in each country's 
consumer price index. 





PERCENT CHANGE FROM PREVIOUS YEAR 








1972 1973 1974 1975 


1976 


1977 




CPJi M'- CPI M CPI M CPI M 


CPI M 


CPI M 


Italy 

France 

United Kingdom 


- 5.7 10.4 10 8 24.3 19.1 22.4 17.0 21.7 

5.9 11.3 7.3 12.4 13.7 18.6 11.7 17.3 

7.1 12.8 9.2 12.6 16.0 17.1 24.2 26.3 


16.8 21.1 
9.6 14.7 
16.5 16.6 


18.4 25.0 
9.8 12.7 
17.1 10.0 



1 CPI = Consumer Price Index. 

2 M = Hou-|y earnings in manufacturing. 

Source: OECD Economic Outlook, 1973-77. 

In all years on the table, and for all three countries — except Britain 
in 1977 — changes in hourly earnings in manufacturing exceeded the 
increase in consumer prices. Particularly striking are the very large 
increases in real income gained by Italian industrial laborers. The 
table shows that even in the early part of the inflation, industrial 
workers were increasing their real income, and continued to do so 
throughout the entire period shown on the table. The table also in- 
dicates the extremely high rates of inflation experienced by Italy and 
the United Kini»-doni from 1074 to the ])resent. (See section IT-B of 
tliis study for data on inflation for the three countries from 1955 to 
1075.) 



- For the United States it is only 22 percent. 



14 

B. The 1973-74 OPEC Oil Price Increases 

The 1973-74, and subsequent, OPEC oil price increases logically 
belonged in the preceding section. However, because of perceptions of 
the impact of oil price increases on inflation, on the balance of pay- 
ments, and on the exchange rates of each of the three countries under 
consideration, these topics will be treated separately here. 

In the first quarter of 1973, the oil companies and oil producers in- 
creased oil prices by 12 percent. In October, the Organization for 
Petroleum Exporting Countries (OPEC) announced an increase of 
over 50 percent, to $5.04 a barrel. Then, effective January 1974, OPEC 
announced a further increase to $10.50 a barrel. Thus, in the 12-month 
period from January 1973 to January 1974, oil prices had increased 360 
percent. Further OPEC oil price increases were announced in October 
1975 and December 1976. 

1. IXFLATIOXARY EFFECTS 

The impact of the oil price increases upon other oconoinic phenom- 
ena varied consi(lei'al)ly. TJie shortest lastin.o: direct impact was on 
inflation rates. In 1973 and 1974, the years in which oil prices increased 
most, the immediate contribution to increased inflation was as follows : 



Increase due to oil price Percent of CPI increase due 
Total increase in CPI rises to oil price rises 

1973 1974 1973 1974 1973 1974 

Italy 10.8 19.1 0.6 3.8 5 20 

France 7.3 13.7 .4 2.7 5 20 

United Kingdom. 9.2 16.0 .5 2.9 5 18 

Source: OECD Economic Outlook, vol. 15, July 1974. 

As the table indicates, 1973 oil price increases contributed only 5 per- 
cent of the rise in consumer prices in the three countries. In 1974, the 
contribution to increased consumer prices was 20 percent or less. Or. 
put inversely, factors other than oil prices caused 80 percent of the 
increase in consumer prices in 1974. 

Unlike food, enerixy related prices play a small direct role in the 
construction of the Consumer Price Index (CPI). For Italy, heating, 
lighting, and gasoline prices comprise onh^ 6 percent of the CPI. For 
France, the figure is 5.3 percent, and for the United Kingdom, it is 
slightly less than 9 percent. 

Wliile liiglier ejK^rgy costs do continue to be inc()r])ornte(l gi'adunlly 
into product prices tlii'ongliout tho tliree economies, tlie dinn-t infla- 
tionary (effects were largely dissipated by the end of 1975. 

■2. H.\LANCK OF IWYMFXTS 

AVhile the direct inflationary impact of t]i(» 107'")-74 oil ])rice in- 
creases was relatively transitory, the effect on tlie balnnce of ])aymenls 
of the three countries has been nnich gi'eater and contiTniing. 

In the wake of the 197'>-74 oil price increases and tlie 1974-75 reces- 
sion (discussed below), the OE(T) area trade balance fluctuated 



15 

wildly. For the OECD area as a whole, tlio ivmh balance went from 
a surplus of $8 billion in 19To to a defieit of $:^().r> billion in 11)74 — a 
turnaround of $^U billion in 1 year. In response to the 11)74-75 reces- 
sion and decreased oil consunii:)tion, the trade balance swun^ into sur- 
plus $5.8 billion in 1975 — a net turnaround of $oi2 billion. Then, in 
197(), in response to the recovei-y, the area trade balance attain swung 
back into deficit — a turnaround this time of $24 billion. 

Of the three countries that are the subject of this study, only the 
behavior of France's balance of trade matched that of the OECD area 
as a whole. The reason for this is that Italy and the United Kingdom 
were already running trade deficits in 197'^, and l)oth countries con- 
tinued to run substantial trade deficits through the first half of 1977. 

In 1974, the French trade deficit was $3.8 billion, a $4.6 billion turn- 
around from the 1973 trade surplus. The trade deficits of Italy and the 
United Kingdom worsened by $4.5 and $6.5 billion, respectively, in 
1974. For Italy and France, the trade deficit increased less than the 
increase in oil prices. This indicated that the non-oil trade balance 
was moving toward a surplus. For Britain the increase in the trade 
deficit for 1974 — to a total of $11.9 billion — exceeded the increase in 
oil prices of over $1 billion, indicating that the trend of the non-oil 
trade balance was continuing toward deficits. 

In 1975, the volume of oil imports into the three countries declined 
approximately 20 percent as a result of recession and higher oil prices. 
This reduction in imports w^as accompanied by a 10 percent increase in 
expenditures for oil. The French trade balance, showing great re- 
silience, was in surplus $1.8 billion — a turnaround of $5.7 billion. 
^\niile remaining in deficit, the trade balances of Italy and the United 
Kingdom improved $7.3 and $4.8 billion, respectively. 

The gradual economic recovery in 1976 elicited three different 
responses from the subjects of this study. France increased its petro- 
leum imports 15 percent and experienced a 19-percent increase in oil 
impoii: costs. The French balance of trade, however, swung into a 
deficit $4.7 billion — a $6.5-billion turnaround. Italy maintained its 
1974 oil import level, but paid slightly more because of the 1975 OPEC 
oil price increases. The deficit in the Italian balance of trade, ho^vever, 
increased by $2.8 billion to $4 billion. The United Kingdom reduced its 
oil imports below the 1975 level. This reduction w^as partly because of 
continuing economic stagnation but also because of the utilization of 
the first significant quantities of North Sea oil. The latter amounted to 
12 million tons for the year, an average of about 240.000 barrels a day. 
^AHiile net petroleuni impoits into the United Kingdom dropped 6 per- 
cent, expenditure for petroleum imports rose about 7 percent because of 
price increases. In 1975, the United Kingdom balance of trade re- 
mained in deficit — $6.4 billion total — though there was a $7l8-million 
improvement over the previous year's deficit. 

One method of ascertaining the long-term costs of the 1978-74 
OPEC oil price increases for the three countries is to compare the 
amount spent on oil imports for the period 1970-72 with the amount 
for 1974—76. On this basis it can be determined that in the first 3-year 
period approximately 1 billion tons of oil cost $20.1 billion. In the 
second 3-year period, a slightly smaller amount of oil cost $82.2 bil- 
lion — over four times more. How^ever, this method probably overstates 
the amount of the increase because it ignores the preexisting price and 



16 

consumption trends in the three countries. It is possible to attempt to 
estimate what would have been the cost of crude oil imports to the three 
countries in the absence of the 1973-74 OPEC oil price increases if two 
assumptions are made to extrapolate from the past : first, that imports 
would increase 10 percent a year — a fi<2:ure fairly close to the actual 
growth rate of the three countries combined prior to 1974, and second, 
that prices would increase 10 percent a year — a fifrure that is high 
compared to pre-197'2 experience. The calculations made on this basis 
for the three countries indicate that the total cost of crude oil imports 
for the 4 years 1978-76 would haA^e been S48.5 billion. Actual imports 
of crude oil into the three countries for the 4-year period were $92.3 
billion. Thus, the estimated amount of the OPEC increases in oil costs 
to the three countries is about $43 billion over this 4-year period, or an 
averaofe of 810.9 billion a year. 

Usin<r estimates for each country made on the basis of the two 
assumptions stated above, one can see the imderlyin^r strenofth of the 
Fi-ench ti'ade balance and the weakness of the Ignited Kiu<rdom's. For 
France, the actual versus estimated oil costs indicate that the balance 
of trade probably would have been in surplus every year from 1973 to 
1977 instead of just in 1973 and 1975. On the other hand, the estimated 
contribution of the 1973-74 oil price increases to the United Kiuirdom's 
trade deficit never exceeded 50 percent — indicating that the balance of 
trade probably would have remained heavily in deficit all 4 years. For 
Italy, the balance of trade would probably have been in deficit every 
year except 1974 when it probably would have recorded a surplus 
rather than a $1.1 billion deficit. For 1974 and 1976, had there been 
only the "normal'* estimated increases, there still probably would have 
been deficits, but small ones. For 1973, the difference in actual and esti- 
mated oil costs amounts to only 11 percent of the deficit for that year. 

It should be noted that the use of the two assumptions stated above 
bv themselves probably distorts the potential balance-of -trade effects of 
the oil price increases because it is assumed that the exports from Italy, 
France, and the United Kingdom during the 4-year period would 
behave as those exports actually did. It is likely that this overstates the 
amount of exports because a significant portion of the increases in 
exports since 1974 has been to oil producing countries. In the absence 
of oil price increases, it is unlikely that exports to these countries 
would have increased to the degree tliat they did. 



17 



z 

5< 



^i 




Source : OECD Economic Outlook, vol. 21, July 1977, p. 142. 



18 

3. EXCHAXGE RATES 

While discussed in greater detail in section III-F of this study, at 
this point it should be noted that the exchange rates of Italy, France, 
and the United Kingdom since the beginning of the floating exchange 
rate system in 1973 have reflected the basic underlying balance-of-pay- 
ments positions of the respective countries rather than the specific 
problems caused by increased oil imports. 

As indicated on the chart (See p. 17), the effective exchange rates of 
both the lira and the pound sterling fell gradually, but steadily, 
through 1973, 1974, and 1975. Precipitous declines took place in both 
rates in the first half of 1976. The pound continued to decline sharply 
until October 1976 when it recovered slightly and remained stable 
through mid-1977. The appreciation of tlie pound since October 1977 
does not appear on this chart. The lira, after also falling shai'ply in 
early 1976. recovered somewhat in midyear but then continued to 
depreciate slowly throughout the rest of the year and into 1977. By 
uiid-1977, the effective depreciation of the pound from its first quarter 
1970 level was almost 4-1: percent ; for the lira, the effective deprecia- 
tion was almost 45 percent. 

Tlie effective exchange rate of the franc appreciated slightly in 1973, 
depreciated slightly in 1974, recovered gradually throughout 1975, and 
then depreciated slightly in 1976 and into 1977. By July 1977, the franc 
had effectively depreciated about 10 percent from its first quarter 1970 
level. 

C. The Recessiox of 1974-75 

For Italy, France, and the United Kingdom, the start of the 1974- 
75 recession took place in July 1974. The recession gatliered force 
through the end of 1974 and into 1975, finally reachin£r bottom in July 
1975. While recovery began at different rates for the three countries in 
the third quarter of 1975, the long-term effects of the recession, espec- 
ially high level of unemployment, are still causing serious problems 
for the three countries. 

The origins of the recession lay partly in the two economic phe- 
nomena just discussed : Inflation and the oil price increases of 1973-74. 
For the OECD as a whole, the first half of 1973 recorded one of the 
strongest real GNP rises in the postwar period. Real GNP increases 
for Italy, France, and the Ignited Kinodom were 5.4, 6.1, aiul 5.4 
percent a year respectively. The combination of tliis sti'ong increase 
in GXP and the commodity shortages and inflation which had be- 
gun in 1972. led many governments to institute restrictive monetai'v 
and fiscal policies. As an example of the results of tighter monetary 
policy, the call money rate in France rose from 4.5 percent in mid- 
1972 to 14.5 percent in mid-1973: for the United Kingdom, the local 
authorities deposit rate rose from 4.5 percent in mid-1972 to 16 per- 
cent by the end of 1973. 

Inflation also strongly affected demand as in most OECD countries 
the inflation-induced decline in real disposable income led to a weaken- 
ing of consumption. For the I'^'nited Kingdom and France, domestic 
demand began to weaken as early as the third quarter of 1972. Italy, 
following a less restrictive monetary policy, did not experience any 
substantial weakening of domestic demand until almost a year later. 

The weakness of internal demand in the three countries was masked 



19 

by the continuin<r liigh level of industrial production. F'or France and 
Italy industrial production did not peak until July 1974, while for tlie 
United Kintrdom, it declined at the end of 197:5 only to recover ao^ain 
until July of 1974 before fallino; back. The OECD has suggested that 
industrial production continued to grow in this period of slack do- 
mestic demand mainly Ix'cause of strong demand for exports by noii- 
OECD countries and also because of certain involuntary additions to 
stocks."^ 

In any case, the deflationary effects of the oil price increases, already 
weak but masked domestic demand, and restrictive monetary and fiscal 
policies all took effect in the first half of 1974. In Italy, industrial pro- 
duction fell almost 30 percent from its 1974 peak to its third-quaiter- 
1975 trough. For France, the 14-percent decline in industrial produc- 
tion was not quite as severe and recovery^ got underway somewhat 
earlier. While the absolute decline in the United Kingdom's industrial 
output from 1973 to 1974 was only 12 percent, because of the long- 
term sluggish performance of industrial production, the 12-percent 
decline effectively returned British industrial production to its 1970 
level. And. recovery in the Ignited Kingdom began later, and was much 
more sluggish than in Italy and France. (See section III-B of this 
study for examples of earlier periods of slow growth by the United 
Kingdom both before and after recessionary periods.) 

GROWTH OF REAL GNP (OR GDP) 
(Percent change year to year] 





1972 


1973 


1974 


1975 


1976 


Italy 


3 4 


5.4 
6.1 
5.4 


3.2 
3.9 

.1 


-3.5 
-L8 


5.5 


France. 


5.5 


5.2 


United Kingdom 


3.5 


1.4 



As the table indicates, the recession hit Italy and the United King- 
dom most strongly, with each recording negative growth rates for 1975 
as a whole. Italy recovered quickly in 1976, reaching close to its long- 
term average rate of growth, w^hile the United Kingdom recovered 
much more .<^lowly toward its lower, long-term average growth rate. 
France experienced a serious slowdown during the recession but re- 
covered quickly and strongly in 1976. However, the growth rates of 
all three countries slowed considerably in the first half of 1977. 

UNEMPLOYMENT RATES 





1973 


1974 


1975 


1976 


1977 

1st 

quarter 


Italy.. 

France 


3.7 

2.6 


3.1 

2.7 
2.9 


3.6 
4.1 
4.4 


3.9 
4.0 
6.0 


4.1 
3 9 


United Kingdom 


2.8 


6.0 









For all three countries the most important, and most politically 
sensitive legacy of the 1974-75 recession has been levels of unemploy- 
ment that are. and remain, higher than at any time since the post- 



■^ OECD Economic Outlook, vol. 16. December 1074. 



20 

World War II recovery. The continuing high levels of unemployment 
are presenting major political problems for the governments of all 
three countries. For the United Kingdom, the number of unem- 
ployed has grown steadily from a low of 498.000 in the fourth quar- 
ter of 1973 to over 1.4 million in December 1977. The trend is expected 
to be upward or at best stable for the next several months. For France, 
the problems are similar to those of the United Kingdom (over 1 mil- 
lion unemployed as of Xovember 1977) , but the French economy has in 
the past shown much greater resilience in recovering from periods of 
slow economic growth than has the British one. Designed with the 
March 1978 elections in mind, the reflationary package announced by 
the French Government in September 1977 is an attempt to lower the 
high rates of unemployment without woi^ening inflation. For Italy, 
with over 1.6 million unemployed in July 1977 and stagnating indus- 
trial production, the long-term effects of the 1974-75 recession have 
been very difficult to overcome. The widespread unemployment among 
Italian young people has been a major factor in the recent outbreaks 
of political violence in Italy. 

D. Foreign Official Indebtedness 

One of the distinguishing characteristics of the behavior of the three 
countries, particularly Italy and the I'nited Kingdom, in tlieir re- 
sponse to recent balance-of-payments difficulties has been the extensive 
financing of the deficits that has been undertaken compared to earlier 
periods. Instead of deflating internally to bring their external ac- 
counts into equilibrium, using reserves, or allowing their currencies to 
depreciate, each country, in differing degrees and at different times, 
financed its balance of payments deficits through borrowing. Funds 
were obtained from the Eurodollar market, through the Euro|3ean 
Community, from other central banks, and from the International 
Monetary Fund, either through regular IMF credit tranches, the Oil 
Facility or the General Arrangements to Borrow. 

1. ITALY 

For 1972, the year of the beginning of the commodity price lx)om, 
but before the major oil price increases, Italy's overall balance of 
payments was already in deficit some $720 million. This deficit was 
financed mainly from reserves but also through the technique of delib- 
erately orderinir state or state-controlled enterprises to finance major 
improvements by borrowing in international capital markets. These 
^'compensatory loans" would then appear as an inflow on capital ac- 
count in the balance of ])ayments. The use of this technique distorts the 
ovei'all balance because it understntes the amount of financing that 
would have been required through official reserves transactions to 
establish a balance. In the next P> years, compensatory loans were used 
extensively, at times to counterbalance deficits on capital account or, 
increasingly, deficits on trade account. 

In 1978, in the wake of the commodity price boom and the first part 
of the oil price increases, Italy's trade balance deteriorated sharply, 



21 

reaching a $8.0 billion deficit for the year. In addition to instituting 
various nionotarv and fiscal iK)licios to dampen demand, the Italian 
(xovernmejit obtained moi'e compensatory loans. Al)out $4.4 billion 
wortli of compensatory loans wei-e floated in 197^^, contributing sig- 
niticantly to the $8 billion surplus on capital a(;count. Mainly because 
of these loans, Italy's resciTes actually grow slightly in 107'>. 

Italy's trade deficit reached $8.4 billion in 1974. With the loans made 
in 1978 in the background, the fmancing of the huge current account 
deficit for 1974 became incieasingly difficult. During the first quarter 
of the year, the deficit was financed by $1 billion in com[)ensatory 
loans, by discounting a $1.9 billion loan negotiated with the European 
Comnumity, and by increasing tlie foreign indebtedness of Italian 
connnercial banks some $5 billion. In the second quarter, the deficit 
was financed by a $1.4 billion drawdown in foreign exchange reserves 
and further compensatory loans. From the middle of 1972 to the end 
of the first quarter of 1974, compensatory borrowing totaled about 
$8.5 billion. Taking advantage of a slight improvement in the over- 
all balance in the third quarter, Italian monetary authorities built 
up their reserves l)y discounting a $2 billion loan from the West Ger- 
man Central Bank and by obtaining $1.6 billion in IMF credits. The 
IMF credits were $300 million from the Oil Facility, $805 million from 
Italy's first, or gold, tranche, and $1.5 billion from a standby credit 
that had been arranged in April 1974. Finally, in December 1974, Italy 
negotiated a medium-term loan of $1.4 billion with the European 
Community. This made a total of $8.8 billion in loans of various dura- 
tions arranged with the EC in 1974 alone. On the basis of the credits 
noted above and another drawing of $845 million in early 1975. Italy 
was the single largest user of IMF facilities for the Fund's fiscal year 
1975, taking 38 percent of the total drawings of resources for that 
period. 

The improvement of Italy's current account position in 1975 (from 
$7.8 billion deficit in 1974 to $0.5 billion deficit) was substantial, but 
the trade balance progressed during the year from a surplus in the 
first 6 months, to a worsening deficit in the last half of the vear. For 
the year, Italy borrowed a total of $1.2 billion from the IMF, $800 
million in the first quarter to help cover the 1974 current account defi- 
cit and build reserves, and about $900 million from the Oil Facility 
in the third quarter when the current account began to move into 
deficit again. The rest of the overall deficit for the year was financed 
mainly bv drawing down reserves. After inteiwening heavilv to sup- 
port the lii-a in the last quarter of 1975 — losing over $1 billion in re- 
serves in the process — Italian monetai'y authorities allowed the lira to 
float freely for the last ])art of January 1976, and all of February. The 
lira promptly began to depreciate, and, compared with the beginning 
of the year, fell 25 percent to 900 lira per dollar, by mid-April. 

In the first half of 1976, the deficit on capital account was financed 
partly by a reduction on the assets held abroad by private Italian 
banks, and partly by the floating of further official loans bv Italian 
monetary authorities. These official loans consisted of $1 billion from 
the European Community, $500 million from the West German Cen- 



22 

tral Bank, and $500 million from the U.S. Federal Reserve System. 
As a result of these steps, Italy's total reserves increased $1.7 billion 
from the end of 1975 to the end of 1976. 

A standby credit of approximately $530 million was arran^red by tlie 
IMF partly throuofh the General Arranofements to Borrow (GAB) in 
Mav 1977. The GAB credits had not been used bv the end of October 
1977. 

The early 1970 short-term loans from the American and West Gor- 
man central banks illustrate one difficulty in tracking the current 
status of Italy's external indebtedness. They, like other central bank 
loans, were designed for short-term balance-of-payments financing. 
Short-term loans, by definition, are to be repaid within a year — often 
in 6 months. Thus, in many of the quarters in which Italy was borrow- 
ing from one source, repayments simultaneously were being made to 
the same or other sources. The same difficulties exist in examining 
the indebtedness of the United Kingdom. 

As of the end of 1976, Italy's total medium- and long-tenu indebted- 
ness amounted to some $19.6 billion. One billion dolhirs of this was 
suppliers* credits. The remaining 5>18.6 billion consisted of $6.9 bil- 
lion of official Italian monetary authority loans, and $11.5 billion in 
other loans. However, of this $11.5 billion, slightly more than $9 bil- 
lion consisted of loans made to state or state-controlled enterprises. 
And of the $9 billion, $5.8 billion were compensatory loans. Thus, at 
the end of 1976. Italy's medium- to long-term indebtedness arising 
either from official or officially guaranteed loans umounted to somo 
$15.9 billion. 

ITALY: PROJECTED REPAYMENT OF OFFICIAL FOREIGN DEBT 
|ln millions of U.S. dollars] 

Amortization payment to— 

Interest Total 

International Private payable service 

organizations sources on debt charges 

Total .- 6,732 6,547 3,022 16,301 



1977 826 

1978 3,^95 

1979 804 

1980 419 

1981 613 

1982 399 

1983 155 

1984.. 

1985. 



5^7 


927 


2,301 


571 


706 


4,772 


1,369 


514 


2,689 


822 


364 


1,607 


896 


257 


1,785 


832 


162 


1,394 


1,211 


74 


1,441 


204 


11 


215 


90 


4 


94 



The repayment schedule for Italy's official foreign debt, wliich a})- 
pears above, shows that Italy will have a heavy debt service burden to 
bear in the next 3 years, with almost $5 billion due in 1078 alone to 
public and pi'ivate lendei's. If this schedule is maintained, the repay- 
ment burden of the official debt inciuTed in the 1972-76 period will not 
lessen signiiicautly before 1984. 

While the tuiiiaround in Italy's overall balance of payments from 
a deficit of slightly less than $3 billion for 1976 to an exj)ected sur- 
plus of $1.5 to $2 billion is encouraging, the amounts to be I'epaid in 
the jM'ar future remain very large. Hepayment will i'e([uiie vvvn larger 
surpluses, refinancing, or lx)th. 



23 



2. UNITED KINGDOM 



While the United Kinoffloni has luul biilance-of-payinents prohloins 
since the middle of World War II, the n^cent delicits and the l>orro\v- 
ing needed to finance them have been extraoiclinaiy. After the 1007 
devaluation of the pound, the United Kin<2:dom's tiade balance Ix^gan 
to impi'ove slowly. By 19G9, the trade deficit was only $:27l million, 
and the current account was in surplus some $1.1 billion. Aftor li 
years, the trade balance swung into deficit in 1972. For the period 
1972-76 inclusive, the United Kingdom's cumulative trade deficit 
exceeded $32 billion; the deficit on cun-ent account was over $1(1 
billion. 

Following a $1.5 billion ti'ade deficit in 1972, the United Kingdom 
began to ex[)ericuce a current account deficit in the second (juarter of 
1973. This deficit, and the desire to slow the effective depreciation of 
the pound, led the British Government to take monetary and fiscal 
steps to deal with these problems. One of the steps was the creation of 
an ''exchange cover' scheme which was introduced in the May 1973 
budget. The exchange cover scheme is a program under which the 
British Government guarantees foreign buyers of securities floated 
by British local authorities or nationalized industries against ex- 
change risk in retui-n for accepting lower interest rates. The exchan<re 
cover scheme was designed to affect the balance of payments in the 
same manner as Italy's compensatory loans. Thus, it was a method 
of financing current or capital account deficits through borrowing — 
borrowing wdiich appears as a credit on capital account rather than as 
a debit on official reserves transactions. From the inception of the ex- 
change cover scheme in March 1973 to the end of the year, $2.5 billion 
in foreign currency boi'row^ing took place under its auspices. In the 
first half of 1974, the $1.8 billion in public sector borrowing trans- 
acted under the scheme amounted to over 40 percent of total capital 
inflow into the United Kingdom for that period. 

In spite of an $11.9 billion trade deficit for 1974 as a whole, the coni- 
bination of a high level of public sector borrowing under the exchange 
cover scheme, access to Eurocredits, and increases in sterling holdings 
by foreign central monetary authorities were such that overall re- 
serves increased some $460 million. Borrowing under the exchange 
cover scheme by public sector bodies amounted to some $2.5 billion. 
Oil exDorting countries increased their reserves held in sterlinof more 
than $5.3 billion — this outweighed a decline of about $2 billion in 
other countries' holdings of official sterling. Finally, in the fourth 
quarter of the vear, the Treasury used $1.5 billion of a $2.5 billion 
medium -term Eurocredit standby arrangement wdiich had been set 
up in March 1974. 

While the deficit on current account declined to $1.5 billion in the 
first quarter of 1975, simultaneously the inflow of surplus sterling- 
denominated oil funds declined. As a T'esult, the Treasury wns obliged 
to draw the last $1 billion of the ^2.5 billion medium-term credit that 
had been set u}') the previous March. In addition, another $1.1 billion in 
public sector borrowing took place under the exchange cover scheme. 

In the second quarter of 1975, the pound beo^aii to fall steadily and 
$609 million in i-eserves were used to support it. In spite of this inter- 



24 

rention, the exchange rate continued to decline gradually during the 
rest of the year. 

In Januaiy 1976, the United Kingdom drew almost $1.2 billion 
from the IMF Oil Facility. In addition, for the first quarter of 1970, 
public sector borrowing of some $600 million took place under the 
exchange cover scheme. 

For the first 2 months of 1976, the exchange rate of the pound was 
relatively stable. But, beginning in March, the exchange rate for ster- 
ling began a rai)i(l decline and did not stabilize until early June when 
the pound leveled out at $1.70. In ^larch, April, and ^lay alone, official 
support operations exceeded $2.5 billion. This Avas by far the largest 
official intervention in support of the pound since the beginning of the 
floating exchange rate scheme. On June 7, 1976, the central banks of 
the Group of 10 and the Bank for Inteinational Settlements (BIS) 
announced the authorization of $5.3 billion in standby credits for 
Britain. The exchange rate for the pound stabilized, then recovered 
to $1.80. However, the pressure on sterling resumed in August and 
further exchange market intervention took place. In the third quarter, 
this amounted to some $1.5 billion. Foreign currency borrowing under 
the exchange cover scheme during this quarter was $800 million. In 
September, the $5.3 billion Group of 10-BIS standby credit was re- 
newed for another 3 months. 

According to the OECD. during the first three quarters of 1076, 
$5.9 billion in official borrowing took place, mainly to cover current 
account deficits. The borrowing consisted of: $2.5 billion under the 
exchange cover scheme, $2 billion from the IMF ($1.2 billion from the 
Oil Facility, $800 million in tranche credits), and $1.5 billion from the 
$5.3 billion Group of 10-BIS standby. 

Following the record fall in the price of sterling in the last week 
of September 1976, the Callaghan government announced that a $3.9 
billion standby credit was being requested from the OIF. Sterling 
continued to fall through October 1976, reaching a low of $1.59 on the 
26th of the month. In early December 1976, repayment of the $1.5 bil- 
lion short-term drawing from the Group of 10-BIS loan was made out 
of reserves. 

In December 1976 and January 1977, the Ignited Kingdom made 
arranijements to obtain, if needed, over $8.2 billion to support the 
pound. This unprecedented amount of potential financing Avas ob- 
tained from three sources: (1) On December 22. 1976. the Group of 
10 and Switzerland agreed that through the General Arrangements to 
Borrow (GAB) they would make available the fiiumcinir to eiuible the 
IMF to grant the $3.9 billion loan requested by the Biitish. Because 
of the pressure on its own resources, the IMF was to provide only 
5^580 million of the total. In the first half of 1977, the United Kingdom 
drew down $2.1 billion of the $3.9 billion total. (2) In January 1977, 
the British Government arranged for a $1.5 billion medium-term 
Euromarket loan. One billion dollars of this loan was drawn bv the 
end of May 1977. (3) Finally, in January 1977, the BIS granted'a $3- 
billion credit to bo used to insulate the sterling exchange rate against 
the effects of abrupt withdrawals by foreign officials holders of 
sterlinir. The facility, with an initial term of 2 years, was to be brought 
into play whenever British reserves fell below $6.75 billion. The BIS 



25 

facility was intended to assist in the reduction of tlic use of sterling as 
a reserve currency. 

Followinor the precipitous fall in the sterling exchange rate in 
October 1976, the pound began to recover in November and I)ecember. 
By tlie end of January 1977, the pound had stabilized at about $1.70. 
Total reserves rose from $4.2 billion in December 197G to $10 billion 
by the end of May 1977. Inckided in the $5.8 billion increase in re- 
serves was $2.1 billion from the IMF-GAB credit and $1 billion of 
the $1.5 billion medium-term Euromarket loan. As a result of the 
return of confidence in sterling during the first quarter of the year, 
reserves continued to increase, and reached $13.6 billion by the end of 
July 1977, as British monetary authorities moved to keep sterling from 
appi'eciating by what they considered to be an excessive amount. 

As of the beginning of April 1977, official United Kingdom foreign 
debt was more than $22 billion. Central government debt amounted 
to $11.5 billion of the total. The main components of this $11.5 billion 
are $3.5 billion in Eurocredits, $3.2 billion from the IMF, $680 million 
in sterlinc: guarantee bonds, and $4.1 billion in World War II and 
post-World War II debts. Nationalized industries, local authorities, 
and other public sector indebtedness amounted to $10.7 billion of the 
$22 billion total. Borrowing under the exchange cover scheme was 
$9.7 billion of the $10.7 billion public sector indebtedness. 

Of the $22 billion total indebtedness, $17 billion is scheduled to be 
repaid between 1979 and 1984, with very large amounts due in 1984 
($4.7 billion) and in 1980 and 1982 ($3.2 billion each year). Current 
interest payments are approximately $1.3 billion a year; but for 1977 
and 1978. only $1 billion in principal is scheduled to be repaid. 

By the end of October 1977, British reserves had increavSed to over 
^20 billion. In response to the continuing larj2:e-scale inflow of reserves, 
the fifovernment allowed the pound to float freely on October 31, 1977. 
A^Hiile expressing satisfaction at the anti-inflationary effects of the 
resulting revaluation of the pound which took place, many commenta- 
tors feared that the foreign exchange market might push the exchange 
rate up too far, making Bi-itish goods even less competitive in world 
markets. These fears were based on the view that neither the strong 
balance of payments due to North Sea oil nor revaluation of the pound 
would provide the needed domestic stimulus to the British economy 
to enable it to lower the very high levels of unemployment. 

3. FRAXCE 

Because of its relatively strong balance of pavments position and 
Government aversion to foreign indebtedness, France did not incur 
any official multilateral or bilateral indebtedness in the 1972-76 period. 
However, like Italy pnd the United Kincrdom. state and state-guaran- 
teed overseas borrowing was encouraged by the French Government 
for balance-of -pavments purposes. 

Of the $10.6 billion estimated French external borrowing which 
took place from 1974 to June of 1977, $6.9 billion of the total was by 
state agencies or guaranteed bv the state. Since 1974. the amount of 
state or state-sfuaranteed loans have been as follows : 1974, $1.2 billion : 
1975, $1.4 billion; 1976, $2.3 billion; and 1977, first 6 months, $1.9 
billion. 

20-866—78 3 



26 

While France's foreign indebtedness is not a major problem, the 
sluggish performance of its balance-of-paj^ments (its first trade sur- 
plus in 2 years — some $85 million — was recorded in October 1977) still 
remains a major concern for its government. 

E. The United Kingdom and North Sea Oil 

After initial exploration for petroleum undertaken in the late 1950's 
as an offshoot of the development of North Sea natural gas, a long time 
elapsed before any significant commercial quantities of oil were pro- 
duced. Oil production, which started in 1974, reached 1 million tons a 
year in 1975. In 1976 production rose to 12 million tons, and was 
expected to reach 38 million tons in 1977. By the 1980-85 time period, 
annual oil production from the British sector of the North Sea is 
expected to range between 105-145 million tons a year. 

The development and exploitation of North Sea oil had had a sig- 
nificant impact on the economic and political situation in the United 
Kingdom, and will have an even greater impact in the future. The 
main economic effects of North Sea oil fall into three areas : On the 
British balance of payments, on United Kingdom Government rev- 
enue, and on domestic employment. (See section III-E of this stud}^ 
for balance-of -payment definitions.) 

North Sea oil has affected three components of the balance of pay- 
ments: the trade balance, the balance on invisibles, and the capital 
account balance. 

Prior to 1975, the trade balance effect of North Sea oil was entirely 
negative because the large imports of equipment associated with the 
development of the oil fields and shore facilities were not offset by any 
oil output. "WTiile exact figures as to the total import costs for North 
Sea development are not readily available, for 197G alone imports of 
goods and services were estimated at $2 billion. On the basis of OECD 
estimates, which have so far been highly reliable, the value of oil 
production in 1977 prices will increase steadily from $1.1 billion a 
vear in 1976, to $6.5 billion a year in 1978, to $8.5 billion a year in 
1980, and $11.8 billion a year in 1985. 

This production will affect the trade balance two ways. First, im- 
ports of oil will be increasingly supplanted to the point where the 
Ignited Kingdom becomes self-sufficient in oil. Thus, the current deficit 
in oil and petroleum products — estimated at $7 billion for 1976 — will 
reach zero. By 1980, the petroleum trade balance is expected to move 
into surplus. Second, the high level of oil production-related mer- 
chandise imports will decline as fields are fully developed and the 
overall level of exploration declines. 

Heretofore nonexistent, interest, profit, and dividend payments to 
foreign companies for North Sea oil will now begin to increase, creat- 
ing some drag on the current account balance through their effect on 
invisibles. On the other hand, the decreasing levels of exploration and 
development activity by foreigners will result in lower payments for 
services. 

The net effect of these cross currents will still be strongly favorable 
to the United Kingdom. The OECD estimates that the net effect on 
the United Kingflom current balance will rise from nearly zero in 



27 

1975, reach $8.5 billion in 1980, and grow to $11.8 billion a year by 
1985.* 

In the past, development of North Sea oil has had a positive effect 
on the capital account balance as investment in equipment and shore 
facilities was made by foreign firms. In the future, this source of 
funds will decline, to be overshadowed as noted above, by payments 
for profits, royalties, and dividends which will be considered invisibles. 
Interestingly, because a large portion of the investment in oil jjrodiic- 
tion equipment has been financed overseas, the capital account has not 
been nearly as greatly affected as the trade account. 

In addition to the positive effect on the British balance of payments, 
North Sea oil will also directly benefit the British Government. The 
Government's income from North Sea oil will come from three distinct 
sources: A petroleum revenue tax (PRT), royalties, and taxes on cor- 
porate income. Royalties are levied at the rate of 12.5 percent of 
roughly the FOB value of the oil less the cost of carrying and treating 
it. The PRT is levied at the rate of 45 percent of the gross revenues 
arising from the sale of the oil after deductions for royalties and other 
allowances. Certain modifications can be made in the application of 
the PRT to insure the exploitation of small fields. In some instances, 
it will be suspended completely if it reduces annual profits from a field 
to below 30 percent of capital expenditures. The current rate of cor- 
poration tax is 52 percent. It is levied on net revenue after deduction 
of royalties, PRT, and other allowable costs. 

Because of the way the PRT is currently structured, the British 
Government's revenue is expected to increase sharply after 1979, when 
corporation profits increase. According to official estimates given to the 
OECD, between 1976 and 1980, Government revenue is expected to 
total about 5.5 billion pounds (about $10.7 billion at current exchange 
rates). It is estimated that by the early 1980's. the annual government 
revenue from North Sea oil will average around 3.5 billion pounds 
($6.8 billion at current exchange rates) .^ 

Considering the size and importance of the operations, the impact of 
North Sea oil development on employment in the United Kingdom 
has been fairly small. The OECD estimates that the total amount of 
offshore employment in North Sea related activities in 1976 was less 
than 10,000. It is thought that this figure might rise to 15,000-20,000 
by 1980. However, at least 80,000 people were employed directly or 
indirectly on North Sea oil related activities throughout the United 
Kinofdom in 1976. Given the current high rates of unemployment in 
the United Kingdom, North Sea oil becomes fairly important. 

* OECD Economic Survey : United Kingdom, March 1977, p. 35. 
5 Ibid., p. 51. 



III. BACKGROUND STATISTICAL DATA WITH 
COMMENTARY* 

The data presented in the tables which follow haA^e been selected to 
provide a fairly comprehensive background on the economic perform- 
ance of Italy, France, and the United Kingdom from 1955 to 1975. 
The period has been chosen to enable the reader to ascertain relatively 
long-term trends. The section begins with a cautionary note, and the 
analysis of eacli table also contains comments on possible problems or 
pitfalls in its use. 

A. Cautioxary Xote 

In spite of the care taken in their compilation, the data presented 
in the following tables should be used with caution. There are several 
reasons for this, most having to do w^ith problems of making inter- 
national e^'onomic comparisons, some having to do with the nature of 
statistical collection generally. 

(1) Many of the figures are presented in terms of U.S. dollars. 
Table III-O lists the exchange rates which have existed between the 
dollar and the Italian lira, French franc, and British pound since 1955. 
Two points need to be emphasized about figures converted from other 
currencies into dollars. First, in those years when devaluations or 
revaluations have taken place, the timing of the cluuige can skew the 
anmial figures. For example, if a devaluation takes place late in a year 
and the conversion into dollars uses the new exchange rate, the entire 
year's fio'ures in dollars will be Ioav. This timing-of-conversion prob- 
lem has been exacerbated by the current floating exchange rate system 
which has functioned since the beginning of 1973. 

The second point is that changes in local currency values may not be 
accurately reflected because of changes in the relationship between the 
local currency and the dollar. For example. United Kingdom exports, 
in terms of pounds sterling, may have increased 10 percent from 1 year 
to the next. However, during the same period, the pound may have 
depreciated 15 percent relative to the dollar. Under thCvSe circum- 
stances. United Kingdom exports expressed in dollar terms would 
register a decrease. 

(2) All of the money liiiures, exco])t for those on table IIT-1 are in 
current terms with no adjustment for inflation. Some indication of 
the significance of inflation on the figures presented can be gained by 



•This section was written by Theodor W. Galcll. 



29 

comparino' the two halves of table III-l. The main analytical prob- 
lem caused by h'l^h rates of inflation is that they break tlie price/ 
(luantity relationships for goods, or services, which existed at lower 
rates of inflation. Thus, if one were to see a doublin<r in the value of a 
certain import in a low inflation period, one could assume that tlie 
quantity imported increased some specific amount — perhaps not two 
times, but some value close to it. During periods of high inflation, this 
assumption would become questionable. In view of the very high rates 
of infhition in woi'ld connnodity })i'ices Hince 11)71 and in domestic 
economies, comparative assumptions regarding quantities should be 
avoided. 

(3) Some of the data presented are not defined consistently over 
time. For example, the definition of certain balance-of -payment cate- 
gories was changed by the International IMonetary Fund in 1961 to in- 
clude different economic activities. So, it is not possible to make direct 
comparisons of all balance-of -payments categories before and after 
that date. Similarly, statistics for employment in manufacturing in 
the countries we are concerned with have at different times included 
different groups and different types of firms in the same category. 

(4) A variant of this difficulty is the definitional problem. The cur- 
rent and continuing controversy in this country over the definition and 
coverage of unemployment is an excellent example of the difficulties 
here. Should there be a single figure ? Who should be included ? How 
should data be collected et cetera? Similar problems exist Avith for- 
eign unemployment and other figures except that their definitional 
coverage may not be the same as that in this country. 

(5) The accuracy of the data is also a problem. With labor force 
or trade statistics, the official government statistical agency is depend- 
ent upon the private sector or other government agencies for the 
gathering of information. If the collecting agency is dilatory or non- 
cooperative, the accuracy of the data suffers. 

(6) For most series, the most recent data are subject to revisions. 
In the case of national accounts and balance-of-payments statistics, 
substantial revisions may be made after the data are first published. 
For example, the 1971 IMF Balance of Payments Yearbook indi- 
cated that for 1969, net capital flows from Italy, excluding reserve 
movements, were $529 million. In the 1975 Balance of Payments Year- 
book, this same entry w^as listed as $723 million, a difference of 26 per- 
cent. The significance of these variations for the policymaker should 
be evident. Had compensating decisions been made on the basis of cur- 
rent data, they would have been based on erroneous data. 

(7) Finally, there is the compatibility problem. OECD figures are 
frequently not compatible with U.X. figures; IT.N. figures are fre- 
quently not compatible with United States or other national statistics. 
This problem is particularly bothersome when one source contains a 
short-time series and it proves impossible either to complete the times 
series or to verify it from other sources. 



30 



Tsjle IIl-l 
GROSS NATIONAL PRODaCT IN CI'SRENT M/VRKET PRIG'S 





ITALY* 


f 


FKANCE 




i: . K 




U.S. 






Billion Li 


Lre Si 


11 ion Francs 


Bill 


ion Pounds 


Bill: 


ion Doll 


ars 






/. Change Ye 


.,r 


Chang? Year 




7. Change Ysar 


i Change fear 






to Year 




to Year 




to Year 




to /ear 


1955 


15050 


10.^1 


-: 


7.5 


19.3 


7.2 


398 


°.4 


1956 


16394 


8.9 


19 1 


11. 


20.9 


8.2 


419 


5.2 


1957 


17622 


7.4 


213 


10.9 


22.1 


5.7 


441 


5.2 


1958 


13923 


7.3 


244 


14.5 


23.1 


4.5 


447 


1.3 


1959 


20113 


6.2 


2'2 


11.4 


24.3 


5.1 


483 


8.0 


1960 


21828 


8.5 


301 


10.6 


25.7 


5.7 


503 


4.1 


1961 


24289 


11.2 


328 


8.9 


27.5 


7.0 


520 


3.3 


1962 


27303 


12.4 


36 7 


11.8 


28.9 


5.0 


560 


7.6 


1963 


31261 


14.4 


411 


11.9 


30.7 


6.2 


590 


5.3 


1964 


34179 


9.3 


456 


10.9 


33.4 


8.7 


632 


7.1 


1965 


36669 


7.2 


489 


7.2 


36.0 


7.7 


684 


8.2 


1966 


39707 


8.2 


532 


8.7 


38.3 


6.3 


749 


9.5 


1967 


43682 


10.0 


574 


7.8 


40.5 


5.7 


793 


5.8 


1968 


47157 


7.9 


630 


9.7 


43.7 


7.9 


864 


8.9 


1969 


51951 


10. I 


723 


14.7 


46.8 


7.0 


930 


7.6 


1970 


57940 


11.5 


308 


11.7 


51.3 


9.6 


976 


4.9 


1971 


63319 


9.2 


898 


11.1 


57.8 


12.6 


1050 


7.5 


1972 


69269 


9.3 


1007 


12.1 


66.6 


15.2 


1153 


10.2 


1973 


S2340 


18.8 


1144 


13.6 


74.8 


12.3 


1294 


11.7 


1974 


99056 


20.3 


1324 


15.7 


93.3 


24.7- 


1397 


7.9 


1975 


111809 


12.8 


1442 


8.9 


104.1 


11.5 


1438 


6.7 



0R0S3 NATIONAL PRODUCT IN CONSTANT 1955 PRICES 



1955 


15050 


6.1 


172 


5.0 


19.3 


3.2 


393 


6.0 


1956 


15652 


4.0 


182 


6.3 


19.5 


1.0 


40 7 


2.2 


1957 


16555 


5.7 


193 


6.0 


20.1 


3.0 


411 


.9 


1958 


17307 


4.5 


198 


2.5 


20.2 


.6 


410 


-.3 


1959 


18511 


6.9 


201 


2.5 


21.0 


3.9 


439 


7.0 


1960 


19555 


5.6 


218 


7.3 


22.0 


4.7 


44 7 


1.8 


1961 


21371 


9.2 


230 


5.5 


22.6 


2.7 


459 


2.6 


1962 


22575 


5.6 


2^6 


6.9 


23.0 


1.7 


486 


5.8 


1963 


23929 


5.9 


260 


5.6 


23.7 


3.0 


502 


3.2 


1964 


24531 


2.5 


277 


6.5 


25.1 


5.9 


530 


5.5 


1965 


25284 


3.0 


289 


4.3 


25.9 


3.1 


562 


6.0 


1966 


26789 


5.9 


304 


5.1 


26.3 


1.5 


594 


5.6 


1967 


28795 


7.4 


320 


5.2 


27.0 


2.6 


610 


2.6 


1968 


30551 


6.0 


334 


4.3 


27.8 


2.9 


638 


4.5 


1969 


32207 


5.4 


359 


7.4 


28.2 


1.4 


654 


2.5 


19 70 


33662 


4.5 


370 


3.0 


28.9 


2.4 


650 


-.6 


1971 


34314 


1.9 


401 


8.3 


29.5 


2.0 


674 


3.6 


1972 


35367 


3.0 


423 


5.4 


30.3 


2.7 


710 


5.3 


1973 


37625 


6.3 


447 


5.6 


32.0 


5.6 


730 


5.6 


1974 


39130 


4.0 


464 


3.8 


32.1 


.3 


734 


-2.1 


1975 


37630 


-3.3 


4jS 


.1 


31.7 


-1.2 


722 


-1.6 




21 


year average 


21 vear aver a 


ge 21 year average 


21 


year average 






4.7;: 




'5.0: 




2.57. 




3.1% 



*Gross Domestic Product 

Source: Calculated Iron International Financial Statistics 



B. Gross National Product 

The gross national product (GNP) of a country is the sum of the 
curront market values of the output of goods and services produced 
in tliat country during a year. It should be emphasized that while 
GNP figures provide the most readily accepted measure of the total 
economic activity of developed countries, they are not a direct measure 
of wealth. Rather, GNP is the measure of income generated by all sec- 
tors of an economy durhig a single year, a greater or lesser percentage 
of which contribiiics to the total wealth of the country. Thus, (tNP 
figures can give snapshots of overall economic activity in various 



31 

countries, but they do not give any indication of the current distribu- 
tion of that income, the wealth of the country, or the future ability of 
the country to sustain that level of economic activity. In addition, 
GXP fifrures do not provide any qualitative indicators of living stand- 
ards in the particular economy. 

Growth in GNP is considered a measure of the ability of an economy 
to generate a self-sustaining stream of income to pay for public and 
private needs. The larger GNP, the more there is available for the 
consumption, investment, and government expenditure which the 
society decides is necessary. 

There are several technical difficulties involved in measuring GNP 
which should be kept in mind. The two most important ones are : First, 
GNP. like most of the statistics in this section, is constructed from 
reports on economic activity submitted from the public and private 
sectors. Poor gathering of statistics will result in poor GNP figures. 
Second, especially in countries like Italy with large farm sectors and 
significant amounts of underemployment and unreported goods and 
services transfers, the GNP is understated. Unless some monetary 
value is or can be attached to an activity, it does not show up in GNP 
statistics. 

Great reliance should not be placed upon the exact GNP numbers 
for a quarter or year. However, the trends are reliable indicators of 
the overall economic activity of a country. 

Two GNP tables are presented above. One contains GNP figures in 
current prices, the other figures in constant 1955 prices. Using 1955 as 
a base year for these figures allows one to show changes in GNP 
iDith inflation factored out of the totals. The 1955 constant prices re- 
flect the real — as opposed to nominal — changes in the amount of GNP 
over time. The constant price tables are also included to highlight the 
striking divergences between real GNP and nominal GNP especially in 
the last few years, and to provide a more realistic indication of the 
actual rate of economic growth. It should be noted that the figures 
presented are in national currencies, and are thus not comparable. 

1. ITALY 

Over the 21-year period on the table, the real growth rate of the 
Italian economy averaged a solid 4.7 percent a year. And, except for 
the flat spot in 1964 caused by the 1963 inflationary boom and bust, 
and 1971, Italian real growth rates were quite steady prior to the 
1974-76 worldwide recession. In real terms, the size of Italian GNP 
increased 160 percent from 1955 through 1974, then declined in 1975. 
Real GNP per capita doubled in this period. Nominal GNP growth 
rates during the same period averaged 10 percent a year. However, as 
can be seen by comparing nominal and real growth rates, inflation 
rates were quite hiofh in 1963-64 and have been high continuously since 
1971. Extraordinarily high figures have been recorded since 19f 3. For 
example, in nominal terms, the Italian GNP increased 65 percent be- 
tween 1971 and 1975, while in real terms the increase was only 10 per- 
cent. Except for 1964 and 1971, Italy's real growth rate has ranged 
between 3 and 8 percent a year. 1975 was a year of severe recession, 
recording an actual GNP decline of 3.5 percent. 



32 



2. FRAXCE 

The overall c^rowth performance of the French economy is the best 
of the three countries under consideration, and is quite respectable in 
its o^Yn riffht. aA'eraging 5 percent per annum real <xrowth for the 20 
years from 1955 throuoh 1974. Real GXP per capita increased 114 per- 
cent durinc; this period. There is a surprisinir similarity between the 
overall ori^owth fif^ires for Italy and France, thoufrh not in the pat- 
terns of their o^rowth cycles. In real terms. French GXP grew 172 
percent from 1955 to 1975, while the hgure for Italy was 150 percent. 
Because of a higher rate of inflation, the growth of French GXP in 
nominal terms was higher than that of Italy. For France, the period 
between 1961 and 1973 was one in which real growth rates averaged 
5.6 percent, and did not fall below 4 percent except in 1970. For 1974. 
GXP growth Avas 3.8 percent and 1975 marked a 3'ear of practically 
no real GXP growth. 

3. UXITED KINGDOM 

From 1955 to 1975, the real growth of the British economy was 
among the lowest of developed countries. During this 21-year period, 
the United Kingdom's real GXP increased only 65 percent, or an 
average of 2.5 percent a year. GXP per capita increased even less. 



TABLE I I 1-2 
INFLATION 



Consumer Price Index 
(1955=100) 



Italy France U.K. U.S 



1955 


100 


100 


100 


100 


1956 


103 


102 


103 


101 


1957 


104 


106 


108 


105 


1958 


106 


122 


111 


108 


1959 


106 


128 


111 


110 


1960 


108 


134 


113 


111 


1961 


HI 


138 


116 


113 


1962 


116 


144 


122 


113 


1963 


125 


152 


123 


114 


1964 


132 


158 


128 


116 


1965 


138 


162 


135 


119 


1966 


141 


166 


140 


122 


1967 


146 


170 


144 


126 


1968 


148 


178 


150 


130 


1969 


153 


190 


159 


138 


1970 


161 


200 


169 


147 


1971 


167 


210 


184 


152 


1972 


177 


220 


198 


157 


1973 


196 


238 


216 


167 


1974 


235 


272 


250 


186 


1975 


275 


304 


311 


202 



?ezi 


:ent Chan 


ges in 




Con, 


suT.er Prices 




(Jan; 


aary to J 


aauiry) 




Italy 


France 


U.K. 


U.S. 


2.3 


1.0 


4.3 


~ . ^ 


3.4 


4.3 


5.4 


1.4 


1.2 


-.7 


3.7 


3.4 


2.9 


15. A 


3.0 


2.7 


-.5 


5.8 


.6 


.9 


2.4 


4.1 


1.1 


1.5 


2.1 


2.4 


3.5 


.9 


4.7 


5.3 


4.2 


1.1 


7.5 


4.9 


2.0 


1.1 


5.9 


3.3 


3.3 


1.3 


4.6 


2.7 


4.9 


i.6 


2.4 


2.6 


3.9 


2.3 


3.8 


2.8 


2.5 


2.7 


1.3 


4.5 


4.7 


4.1 


2.7 


6.1 


5.5 


5.3 


5.0 


5.9 


6.4 


5.9 


4.8 


5.4 


9.5 


4.3 


5.7 


6.0 


7.1 


3.2 


10.8 


7.4 


9.2 


6.2 



19.1 13.6 15.9 11.0 



17.2 11.8 24.2 



9.1 



Source: International Financial Statistics 



33 

The effects of balaiice-of-pavincnts crises can been seen in the real 
growth rates for 1956 (1 percent), 1958 (O.G percent), 19G-J (1.7 per- 
cent), 1966 (1.5 percent), and I960 (1.4 percent). Even in the other 
years, performance of the Britisli economy was slutr^lish. In tlie en- 
tire 21-vear period real ^rrowth in the United Kin<rdom exceeded 4 
percent'a year only three times, in 1960. 1964, and 19To. Prior to 1971, 
the rate of inflation in Britain was low. However, since 1972, infla- 
tion has been a very serious problem. The worst year was 1975, when 
a 24 percent increase in nominal GNP was accompanied by practically 
no real GXP orrow^th. 

C. IXFLATIOX 

The preceding table uses the consumer price index as the measure 
of inflation in the three countries. The consumer price index (CPI) is 
constructed by calculatin": the increases over time in the retail prices 
of a package of specific goods and services. The index base year and 
the component goods and services of the index are changed at certain 
intervals to more closely reflect actual consumption patterns in each 
country. 

There is another statistical indicator, called the implicit GNP de- 
fafor^ which is designed to indicate better the full effects of inflation 
on the entire economy. However, this tool is available only for the very 
recent past, and not for all of the three coimtries of major concern 
here for the entire 1955-75 period. The differences in the recent past 
between changes in the CPI and the implicit GXP deflator have not 
been major. 

In the 16 years from 1955 to 1970, all three countries experienced 
low rates of inflation. Except for the 15.4 percent increase in 1958 
for France, the rate of inflation did not exceed 6.5 percent a year for 
any of the three countries. For the 16-year period, the average rate of 
inflation for Italy was only 3.2 percent; for France, 4.4 percent; and 
for the United Kingdom, 3.6 percent. Both Italy and France actually 
experienced negative rates of inflation at different times during this 
period. If 1958 w^ere excluded from the total for France, the 15-year 
average inflation is 3.6 percent, the same as that of the United King- 
dom for this period. 

Beginning in 1970 with the United Kingdom, and 1972 for Italy 
and France, the rate of inflation accelerated markedly. The annual 
average for the 1970-75 period for the three coimtries rose to 7.3 per- 
cent for France, 10.4 percent for Italy, and 12 percent for Britain. 
Of the three countries, France weathered the inflationary cycle best, 
returning to single digit rates of inflation by 1976, while both Italy 
and the United Kingdom were experiencing price increases over 16 
percent in that year. The inflationaiy problems that followed the 1972 
commodity boom and the 1973-74 oil price increases were not resolved 
in any short period. For countries like Italy and the United Kingdom, 
the external price increases maofnified the inflationary situation which 
already existed domestically. France, because of its lower import de- 
I>endence and less militant labor force, was better able to cope with the 
externally induced price increases, but only at the expense of a gen- 
eral slowdown in the economy. 



34 



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35 

TABLE III-4 

LABOR FORCE DISTRIBUTION BY SECTOR 

(Percent) 



1955 


ITALY 


FRAl^CE 


U.K. 


Agriculture 


38 


27 


4.9 


Industry 


33 


37 


49 


Other 


28 


35 


46 


1965 








Agriculture 


26 


17 


3.8 


Industry 


41 


39 


46 


Other 


33 


42 


49 


1975 








Agriculture 


15 


11 


2.7 


Industry 


44 


38 


40 


Other 


40 


50 


56 



D. Population and Employment 

Like some of the other statistics presented in this section, popula- 
tion and employment data are less exact than would appear to be the 
case. The total population statistics are extrapolations made on the 
basis of the data collected in each country's census. AVhile there are 
several technical problems concerning the accuracy of the censuses 
themselves and the estimates derived from them, for these countries 
the margins of error are low. The civilian labor force figures are con- 
structed numbers. That is, they consist of those included in the cate- 
gory "civilian employment" and those in the "unemployed" category. 
Thus, the civilian labor force statistics indicate those who meet the 
definitions of being employed or unemploj^ed, not those who actually 



36 

comp^i^e^ tlie potential pool of employable individuals. The figures 
for civilian employment are derived from surveys or questionnaires 
distributed by the respective countries' statistical agencies to reporting 
firms and agencies. The civilian labor force statistics are validated by 
the country's census. In addition to national differences in the method 
of collecting data, the figures for unemployment are subject to serious 
definitional problems concerning who should be included. Differences 
in definition could vary the number reported by as much as 30 percent. 
The figures that appear in the three columns of table III-o are U.S. 
Bureau of Labor Statistics calculations adjusted to common U.S. 
definitions. Because of availability and compatibility problems, the 
data on the last three tables have not been extended back from 1058 to 
1955. U.S. figures are included in the tables to facilitate certain com- 
parisons discussed below. 

The most striking feature of tlie ta):)les is tlie very slow growth of 
employment in the United Kingdom and France, and the actual de- 
crease in Italy. If one were to combine the number of civilians 
employed in the three countries in 1059 and compare it with the num- 
ber of civilians employed in the United States, the U.S. advantage 
would be slightly more than Z million. But, by 1975. civilian employ- 
ment in the United States exceeded that in the three countries by over 
21 million. In this period, the combined civilian employment of the 
three European countries increased a total of 3.7 percent, while civilian 
employment in the United States increased 38 percent — a rate 10 times 
greater. While these gross figures conceal several contradictory trends 
which will be examined below, they do serve to indicate that what 
economic growth has taken place, especially in Italy and France, dur- 
ing this period has not required or generated significant increase in 
employment. It should be noted that a growing labor force can be 
either an asset or a liability, depending upon the state of the economy. 
If the economy is growing rapidly and employment op])ortunities are 
be'ng created, a growing: labor force both contributes to a continuation 
of tlie groAvth as the newly enq-)loyed spend their income and also acts 
as a check on inflationarv wncre increase=^ due to ti^ht labor markets. 
On the other hand, if the economy is slack, a frrowin.o: lalxir force 
means increasing unemployment nnd an increasing drag on the econ- 
omy as the unemployed are supported. 

1. ITALY 

Italy's total ])opulation hns irrown steadilv since 1955 at a rate of 
about 0.8 percent a venr. Durinir this sanip period, civilian employment 
in Italy actually declined 1.2 million. In Italy civilian eui])lovment 
totals include only those employed in Italv. Emigrants, variously 
estimated at a net of 1.5 to 2.4 million during this period, ai-e not 
counted. A very high percentage of emigrants are workei's and would 
have been included in the Italian civilian labor force if they had re- 
mained at home. 

Tbe major social and oronomir fartor l^ohind tho droi) i?i civilian 
em])lovment is the niassive exodus of Italian workers from atrricul- 
ture. In the 90 years l)etween 18fil and 1951. agricultural employment 
fell 2.0 million. In the 94 years l>etween 1951 and 1975, agricultural 
employment fell 5.0 million or almost 28 percent of the 1975 labor 



37 

force. Althoiiijh Fonio of this oxodus was absoii)0(l by othor sectors 
of tlio Italian economy. lar<rc niin»l)crs did not take new jobs on leav- 
ing the lan<l either because they were ohl or because they were female. 
They simply dropped out of the labor force. 

A general characteristic of the Italian postwar eeonomy that has 
contributed to the dex^line in civilian em]>loynient is the fall in the 
partici])ation rate (defined as total of the hibor force as a [)ercenta;i-e of 
the total population). Italian particii)ation lates are now amono- the 
lowest in the world. Rates for males declined from 60 j)ercent in 1960 
to 53 percent in 1975. For females, rates declined from 24 to 10 percent 
in the same peiiod. The main reasons for the decline in participation 
rate are the decline in tlie pensionable a«:e. which took out of the labor 
force older workers; the continuation of basic education later in life 
by increasinir numbers of students, whicli afiected youn^rer potential 
workers; and the breaking down of the extended family, which re- 
quired female parents to remain at home. Current data indicate a con- 
tinuation of the decline of male participation rates and a slight 
increase for female participatioii rates. 

Italian employment figures should be looked at with great caution. 
First, the unemployment figures are gathered on a sample survey l)as:is, 
and the reliability of survey data is leportedly not all that it 
might be. Second, the unemployed aie defined as those of ages 14 or 
above who are looking for their first job or have lost a previous job 
and, in the reference week of the sample survey, are both actively 
searching for a job, are in a position to accept one if offered. Excluded 
from this definition are two large categories of individuals: the ''dis- 
couraged unemploved" who are not looking for work in the reference 
week but had earlier, and those who would have looked but thought 
they were too young, too old. not sufficiently qualified, or would have 
difficulty getting to work. In 1971 when the official unemployment 
figure was reported at 676,000, over 280.000 — alm.ost one-tliird more — 
were included in the latter two categories. 

2. FKAXCE 

For most of the 20th century France ]ias been concerned about its 
low rate of population grovrth. From 1806 to 1930. the po]:)u]ation of 
France grew 3.3 million. Then from 1936 to 1951. the net increase in 
France's population was only 300.000. In 54 years, France's population 
had grown less than 20 percent. And. for various demographic reasons, 
France's total work force was smaller in 1963 than it had been in 1929. 
However, beginning in 1946, tlie population of France began to increase 
steadily and. starting in 1958, the Freiicli labor force also began to grow 
steadilv. 

"VAliile starting from a lower percentage of the work force, in agri- 
culture, France, like Italy, has experienced a massive exodus of 
workers from agriculture in the last 20 years. In 1955. 27 percent of 
the labor force engaged in agricultural pursuits. By 1975, this figure 
had declined by one half. In addition, like Italy, overall participation 
rates in France immediately after World War II were high: 66 per- 
cent for males and 32 percent for females. By 1974, the male rate had 
fallen to 54 percent while the female rate, after falling in the mid- 



38 

sixties, had recovered to 30 percent. The reasons for the decline in the 
male rate were similar to those for Italy : lengthened periods of school- 
ing for the young, earlier retirement for the old. The female rate may 
decline somewhat in the future as larger numbers of women choose 
to continue their formal education. 

However, compared witli Italy, the experience of France differed in 
several major respects. First, after 1958, in spite of the exodus from 
agriculture, the French economy grew at a rate fast enough to absorb 
the displaced farmers and the natural increase in the workforce caused 
by population growth. Second, France, throughout this entire period 
was the destination for migrants from form.er French colonies nnd 
other countries. Xet immigration ranged from an average of 60,000 a 
year between 1955 and 1961, a one-time 700,000 in 1962 as a result of the 
settlement in Algeria, to an average of 130,000 a year between 1963 and 
1974. In the latter period, immigration contributed between 25 and 30 
percent of the increase in the French labor force. Third, unemploy- 
ment in France has, until recently, been quite low. Except for 1968, the 
rate of unemployment between 1955 and 1971 did not exceed 2 percent. 
From 1971 to 1974, it averaged 2.3 percent a year. In the aftermath of 
the 1974-75 recession, it rose to over 4 percent and until very recently 
continued to drift upward. 

3. UXITED KINGDOM 

The total population of the United Kingdom has grown steadily, 
but irregularly since the end of World War II. In the recent past, it 
has grown very slowly. From over 49 million in 1946, it reached 51 
million in 1954. Five years later it increased 1 million, and between 
1962 and 1968 it increased 3 million to 55 million. It then took 8 years 
for the population to increase 1 million. The growth rate for total 
population of the United Kimjdom was 0.49 percent a vear from 1954 
to 1959, rose to 0.64 percent a year from 1959 to 1968, then fell to 0.45 
percent a year since. The major reason was a decline in United King- 
dom birth rate from 17.2 per thousand in 1968 to 13.1 per thousand in 
1974. The natural increase (births minus deaths) was only 70,000 in 
1974. 

The variations in the growth rates of the total population are re- 
flected in the statistics on migration. From 1955 to 1965 the net con- 
tribution of migration to total British population was +80,000. But 
from 1966 to 1974, the net impact of migration on United Kingdom 
population was very significant +508,000, chiefly from British Com- 
monwealth countries. In 1967, for example, the natural increase in the 
total population was 345,000. Net emigration that year was 93,000, or 
over 25 percent of the natural increase. 

Except for 1958, civilian employment in the United Kingdom rose 
steadily from 1946 to 1966, when it reached 24.3 million. It then de- 
clined steadily for 6 years and has not yet returned to its 1966 level. 
Unlike Italy and France, the United Kingdom has had no large farm 
sector to provide large amounts of labor for the rest of the economy. In 
1954 only 4.9 percent of the British labor force was employed in agri- 
culture. Even this figure declined and, by 1975, it was only 2.7 percent. 

One characteristic of the stagnant United Kingdom labor market 
should be highlighted. In 1955, 66 percent of civilian employees were 



39 



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40 

male and 33 percent female. (Note: tliese are not participation rates.) 
By 1975. this ratio had changed to 61 percent male and 38 percent 
female. Given the practically static growth in British civilian em- 
ployment, this means that from 1955 to 1975 the absolute number of 
men employed had increased 300.000 while the number of women em- 
ployed had increased 1.8 million. The continuing decline of several 
labor-intensive, male-dominated industrial sectors, such as coalmining 
and shipbuilding, will continue to contribute to this change in the sex 
ratio of the British work force. 

Unemployment in the United Kingdom has been a real and political 
problem since the mid-sixties. Since 1971 the labor force has been ex- 
])anding about one-half percent a year. However, because of the very 
slow real gi'owth in the economy and significant sectoral unemploy- 
jnent. this increase has not been absorbed. The 1974-76 rece-ssion was 
felt especially strongly in the United Kingdom. By the end of Decem- 
ber 1977 the unemployment rate was 5.4 pei-cent, or over 1.4 million. 
This is the highest number of unemployed in the Ignited Kingdom since 
the Great Depression and an extremely sensitive political issue. 

E. Industrial Activity 

The data on the industrial activity table should be used with caution. 
The figures on employment in manufacturing should be considered 
only as a general indicator of the manpower devoted to industrial pro- 
duction since in each of the three countries, the definition of firms 
engaged in manufacturing has been changed over time. The United 
Kingdom has caused difficulties in making employment figures com- 
patible by changing definitions and, in the case of Xorthern Ireland, 
even changes in geographic co\'erage. As with population and employ- 
ment, the figures on employment in manufacturing are constructed 
from polls, surveys and questionnaires and are subject to error. 

The table presenting the index of industrial production has been 
converted from a 1970 base year to a 1955 base-year to be better able 
TO comprehend the secular changes in output. For the three countries, 
the index is constructed primarily on the basis of data on phvsical out- 
put in mining, manufacturing, electricity, and gas. From the data in 
the categories ju-^t noted, each country then excludes, or- includes, other 
categories which make direct comparisons invalid. Finally, the table 
on time lost for labor disputes understates the level of strike activity 
for all of the countries because small-scale strikes often go unrecorded. 
This source of error is greater for Italy because of its disaggregated 
industrial structure and the large number of small firms. 

1. EMPLOyMEXT IX :^^AXUFA('Tl•KIXG 

Italy 

Employment in manufacturing in Italy grew steadily from 1955 to 
19(;3, leveled oil' for almost 5 years, then resumed its upward climb 
through 1975. During the l>l-year pericxl on the table, employment in 
manufacturing increased a total of 63 percent. In 1955, industrial em- 
ployment was equal to 35 percent of that in l^ritain. 15y 1975, that 
figure had inci-eased to 70 percent. 



41 

Probably the most si<i:nin('ant aspoft of this irrowili h.is been the iivi 
that it has continued, more or less steadily, since 19G7 in spite of tlie 
very checkered experience of Italy with labor nnrest and erratic in- 
vestment in industry. While employment in industry has increased 
some GO percent in the 21 -year period on the table, industrial output 
grew over 200 percent, indicating an increasingly efficient use of labor 
or increased mechanization. 

Franee 

The gi'owth of the industrial labor force in France was quite slow 
and uneven in the 21 yeai^ covered by the table. During that period, 
employment reached a high point in 1974 — only 14 percent moi-e than 
1955 — than fell back the next year in the worldwide i-ecession. Inter- 
estingly, except for 1959, there was, as with Italy, little correlation 
between GXP performance and employment in manufacturing. The 
table shows that production inci-eased at a faster rate than employ- 
ment, indicating an increasingly efficient use of labor. 

U fitted Kingdom 

During the 21-year period indicated on the table, the categories 
included in the statistics for employment in manufacturing were 
changed four different times. Thus, any comparisons between years in 
the United Kingdom or between countries must be highly tentative. 
However, even with the caution engendered by this observation, it is 
strikingly evident that over the period covered by the table, employ- 
ment in manufacturing in the United Kingdom declined signiticantiy. 
over 1.5 million if one accepts the figures on the table as roughly reli- 
able and comparable, and over 1 million in any case. Partly as a result 
of this dramatic decrease, ''The Economist" newsweekly ha^ recently 
spoken of the "deindustrialization" of England. And, since shipbuild- 
ing, coal mining, steelmaking and several other "mature'' industries in 
the British economy are likely to continue their slow contraction for 
the indefinite future, British industrial employment statistics are likely 
to continue to decline. 

The grow^th in industrial production of the United Kingdom was by 
far the slowest of the three countries considered in this report and con- 
sistently near the bottom of OECD statistics of industrial output 
growth. From 1955 to 1973, its highest point, British industrial produc- 
tion increased slightly more than 65 percent. Since then, it has fallen 
several percentage points. 

2. LABOR DISPUTES 

The data on the third part of the industrial activity table are not 
limited solely to industrial disputes. Strikes in the services and Gov- 
ernment sectoi-s are included for Italy and the United Kingdom. For 
France, ci^dl servants and agricultural workers are not included in the 
totals. The exclusion of the French civil service does not markedly 
affect the totals, and although French agricultural workers, usually 
small farmers, irregularly strike over specific policies or grievances, 
their numbers are few and the duration of their work stoppages short. 



>0-866— 78- 



42 

Italy 

Except for 1968 in France, and 1971-72 in the United Kingdom, 
Italian strike activity exceeds that in the other countries — often by an 
average of 300 or 400 percent. Peaks in strike activity were reached 
in 1962, 1969, 1973, and 1975, all years when the level of political 
unrest in Italy was high. However, even in the "off" years, strike 
activity in Italy generally exceeded that in the United Kingdom and 
France. 

One characteristic of strike activity in Italy that should be noted 
is that most strikes are typically of short duration. Thus, the very 
high Italian figures consist of a large number of short duration work 
stoppages. And, compared to France and the United Kingdom, the 
totals include a significant percentage of strike activity by public 
employees. 

France 

Probably the most significant thing about the table, exclusions in 
coverage taken into consideration, is the relatively low level of strike 
activity in France compared to the other two countries in this study. 
With a labor force 15 to 20 percent smaller than that of the United 
Kingdom, French strike activity was consistently 30 to 40 percent 
lower ; since 1969, it has been at least 50 percent lower. A comparison 
with Italy's performance in the 1969-75 period is even more favorable. 
Italy, with a smaller labor force, lost from 2 to 16 times more man- 
hours annually due to strikes than France. From the 21-3'ear perspec- 
tive of the table, the events of May-June 1968 appear to be completely 
extraordinary. 

United Kingdom 

When compared with 1960-68, the average level of strike activity 
in the United Kingdom tripled in the period 1969-75. Prior to 1969, 
strike activity in the United Kingdom was roughly comparable with 
that in France and, on the basis of hours lost per worker, lower. How- 
ever, especially since 1970, the level of strike activity in the United 
Kingdom has increased markedly. While 1970-1974 was a period of 
Conservative government rule, strike activity declined in 1973 after 
reaching the very high level of 23.9 million man-hours lost in 1972. 
Judging on the basis of the data on the table, the reputation of the 
United Kingdom for high strike activity appears to have more or less 
been undeserved until the recent past. 

F. Balance of Payments 

Balance-of-payments statistics, perhaps more than any of the statis- 
tics presented in this section should be looked upon as (1) approxima- 
tions, (2) subject to revision over time, and (3) as requiring detailed 
explanation as to their origins, composition, and weaknesses. Except 
as noted, all of the statistics on the tables above are from IMF figures. 
These in turn are derived from the balancc-of-payments statistics sub- 
mitted by \\\Q individual countries. The IMF and the individual coun- 
tries are continually updating and revising current and past balance 
of payments figures. These revisions result in significant differences 



43 

arising between earlier and later compilationH and between statistics 
issued by different coin[)ilers. The fio-ui'es Dn the tables below are from 
the most recent complete time series available for each country. 

The difiiculties which might arise from relying too heavily upon 
newly released balance-of -payments data for policymaking purposes 
have been noted in tlie introductory cautionary note. One other })itfall 
should be mentioned again : like all of the other data in dollar terms 
presented in this section, devaluation or revaluation induced changes 
in dollar amounts should be kept in mind and compensated for. To as- 
sist in this, years in which major revaluations or devaluations took 
place are marked on the tables with asterisks. 

The balance of payments is a systematic accounting of all of the 
payments and receipts of the government and residents of one country 
with the rest of the world. As noted, the figures on the tables are pre- 
sented in a format which emphasizes the breakdown of the current 
account and the net figures for capital account and official reserves 
transactions, and changes in official reserves totals. Theoretically, the 
balance of payments is in ^'balance" when the current account balance, 
the capital account balance, and the amount of official reserves trans- 
actions add up to zero.^ 

The total reserves figures ^ on the tables have been changed by two 
non-balance-of -payments phenomena in the recent past. First, in 1970, 
1971, and 1972 each of the three countries received an allocation of 
the newly created reserve asset, the "Special Drawing Right" (SDR). 



1 The "Current Account" balance consists of the sum of the balances of three major sub- 
catp^ories : the merchandise trade balance, the invisibles balance, and the balance on 
unrequited transfers. The largest, and most important element of the current account is 
the merchandise trade balance. The balance on merchandise account is the net total valua- 
tion of merchandise exported and merchandise imported during the year. The f.o.b. figures 
on the tables excluded the freight and insurance costs associated with the merchandise 
transactions. The invisibles balance includes the net amounts derived from Insurance, 
shipping, travel, and income from foreign investments. The balance on unrequited transfers 
includes the net amounts for workers remittances from overseas and various forms of foreign 
aid. 

A surplus on current account is an amount that is earned from international transac- 
tions during a year which can be used or invested in several ways : in the building up of 
official reserve assets, in the purchase of real assets abroad (real estate, productive facili- 
ties), or of foreign financial assets (cash, bonds, securities). Conversely a deficit on current 
account means that a country has spent more abroad than it has earned. This deficit must 
be financed by decreasing its holdings of financial or real assets abroad, or by using official 
reserve assets. 

The "Capital Account" balance records the net total transfers of long and shorf term 
capital into or out of a country. Transactions involving direct investments in host country 
or foreign firms, long and short term loans, securities, local and central government financ- 
ing, export credits, and other capital flows are included in the capital account. Statistics 
on current account are somewhat less subject to error when compared to those on capital 
accounts mainly because most of the current account data are obtained from customs or 
other official government statistics while capital account data, except for official loner-term 
financing, are collected less directly or comprehensively, and are frequently subject to 
definitional problems. 

The "Reserve Transactions" balance (also called the Official Settlements P.alance) is the 
figure generally referred to as "the balance of payments." Prior to 1973. the reserve 
transactions balance recorded the amount of official financing necessary to cover the net 
deficit on current and capital accounts in order to maintain fixed exchange rates. After 
March 1973. most exchange rates were allowed to float. With more or less freely floating 
exchange rates, the reserves transactions balance reflects only the degree of governmental 
intervention undertaken to influence a floating exchange rate In the face of market forces. 
The degree of intervention and the ultimate exchange rate is matter of choice not dictated 
by the necessitv to maintain a fixed exchange rate. In keeping with standard accounting 
practices, deficits in the reserves transactions balances on the tables are recorded with a 
plu« sien. wiiile surnlnses anpear with a minus. 

2 "Total Reserves" include all of the liquid official financial assets a country possesses 
whi<"h are acceptable to other countries in meeting balance-of-payments deficits. Thev in- 
clude holdings of other countries foreign excliange, monetary gold, special drawine risrhts. 
and the country's IMF reserve position ; the latter being the amount of the country's IMF 
quota that is automaticallv available for balance-of-pavments finaneiuff. As previouslv 
not^d. since 1973 the earlier close link between the maintenance of fixed exchange rates 
and reserve levels no longer exists. 



44 

For Italy, the total SDK allocation was SlUS iiullion; for France, $409 
million f and for the United Kingdom. $907 million. Second, after 

1974, changes in the valuation of the gold portion of each country's 
total reserves were made to reflect current market prices rather than 
the fixed IMF price of $42.22 an ounce. 

Errors and omissions figures are included in IMF accounting to 
insure that the capital account, current account, and official reserves 
transactions balances arithmetically equal zero. If all monetary flows 
in a certain year were successfully assigned to one of the three major 
accounts, and the total balanced, there would be no errors and omissions 
entry for that year. 

1. ITALY 

C indent account 

Italy's export performance in the 1955-75 period was outstanding. 
Over this entire period. Italy's annual rate of growth in exports was 
exceeded only by that of Japan among industrialized countries. From 
1955 to 1972 the value of Italian exports grew more than tenfold. In 
the next 3 years it almost doubled again. However, inflation played a 
major factor in the latter period as the volume of exports increased 
only 12 percent during that time. Durins: the 1955-72 period, the value 
of Italy's imports grew slightly more than seven times. From 1978 to 

1975, they again almost doubled in value. However, a comparison l)e- 
tween the growth of exports and the growth of imports is misleadinof 
because the merchandise balance in 1955 was heavily in deficit. In fact, 
Italy's merchandise trade balance was in deficit every year from 194G 
to 1964. In 1973 and especially 1974. Italy ran very large trade deficits. 
In the latter year the deficit was duo mainly to the large (about .^G 
billion) increase in the price of petroleum. In 1975, partly due to re- 
cession and partly due to Government policy, imports were cut $2.7 
billion compared to the previous year. 

The two other components of the current account, invisibles and 
unrequited transfers, have been extremely important to Italy's balance 
of payments. Invisibles, above all tourism, provided tlie major offset 
for the continuous inerchnndise ti-ade deficits from 1955 to 1964. Xet 
invisibles doubled from 1955 to 196o. tl>en leveled out and moved ir- 
legularly for the next 12 years. In the recent past, as Italians have bo- 
come wealthier, the net tourism surplus has declined because of greater 
foreign travel expenditure by Italians. Of particular interest for 
Italy's long-term balance-of-payments picture is the recent steady in- 
crease in investment income as returns on the investments that were 
made on the basis of the strong Italian balances of payments in the 
sixties start to come in. These payments will help to offset the secular 
declines in the net balances of the other components of current account. 
Two other parts of invisibles, shipping and insurance, have been con- 
sistently in deficit in the range of $50 to $200 million a year. 

Unrequited transfers, especially remittances from Italian workers 
abroad, made a net positive contribution to the current account from 
1955 to 1971. Since then, however, this item has been heavily in deficit. 
And, as the recession in Kuiope deepened. Italian workers' remit- 
tance's declined, adding to the net deficit on unrequited transfers. 

Caj)ftal accovnt 

The contribution of the capital account to Italy's balance of ])aY- 
ments has been mixed. From 1951 to 1960, foi-eigii investment in Italy 



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45 



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46 

was over $2.9 billion. For the same period, investment by Italians 
overseas was only $1.2 billion. Starting in 1960, private Italian capital 
outflows increased every year, reaching a total of $6.4 billion in 1969 
and again in 1972. On an overall basis, Italy's capital account was in 
surplus from 1955 to 1965. Then, because of increases in Italian invest- 
ment ovei-seas and a leveling oil' of capital inflows, the capital account 
went into deficit for 5 years. Except for a small deficit in 1972, the 
capital account was again in surplus for the next 5 years. Large sur- 
pluses recorded in 1973 and 1974 were due to substantial inflows of 
capital raised by public institutions borrowing abroad in an effort to 
raise capital and to help offset the very large deficits on current ac- 
count recorded those years. Private capital inflows during these 2 
years were below previous levels. 

One balance-of-payments phenomenon unique to Italy deserves 
comment. Normally certain amounts of banknotes are repatriated each 
year by every non-Communist country as businessmen nnd tourists 
exchange the banknotes of the country in question for other foreign 
means of payment. For Italy, how^ever, from 1961 to 1973 the amounts 
of lira banknotes repatriated greatly exceeded "normal" levels. While 
substantial in all of the years mentioned, in 1963, 1968, and 1969, over 
$1 billion a year in lira banknotes were repatriated — the figure for 
1969 being an astounding $2.2 billion. The origin of this phenomenon 
lay in the structure of Italy' tax code. Under Italian law, the income 
on securities owned by foreigners is taxed at a fixed, fairly low, rate. 
On the other hand, taxes on Italian income are progressive. Thus, it is 
to the advantage of wealthy Italian investors physically to take their 
funds out of Italy, deposit them in Swiss bank accounts which are 
then used to invest in Italian securities. The dividends and interest 
which are paid go to a foreign firm, and the Italian taxes are levied 
on this income at the fixed rate for foreign investors — who in fact are 
Italian. 

Bank for International Settlements balance-of-payments statistics 
include the amounts for repatriated banknotes in the capital account. 
The IMF approach, however, would appear to be more logical. The 
Fund enters the banknote balance as a debit in net errors and omis- 
sions since — 

It is not known to what extent the notes, when originally exported, were 
used to settle transactions in goods and services or to make Italian investments 
abroad. * * * Transactions of this kind should be excluded from both debit and 
credit sides of the balance of payments since they do not represent transactions 
between Italian residents and foreigners.' 

The June 1972 decision by Italian authorities to refuse to repatriate 
Italian banknotes illegally taken out of the country practically elimi- 
nated this entry in errors and omissions. 

Total reserves nr\d official reserves transactiovs 

From 1955 to 1071, Italy's balance on official reserves transactions 
was in surplus all but 3 years. (Wien reading the table invert the 
minus signs.) Of the 3 doJRcit years, only in 1969 was the current ac- 
count also in deficit. However, in 1974 and 1975, both current account 
and the balance on official reserves transactions were heavily in deficit. 



* IMF Balance of Paynicnts Yonrhook, vol. 17. Mnroh 1900. 



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48 

Italy's total reserve holdings grew steadily from 1955 to 1962, then 
declined $400 million in the following year as a result of the defense of 
the lira made necessary by the 1963 current account deficit. In a rapid 
turnaround, a large ($1 billion) increase was recorded in 1965 on the 
basis of a very^ strong current account. Growth in total reserves con- 
tinued until 1968-69 when 2 j-ears of capital account deficits lead to a 
decline in reserves. In 1971, another large ($1.4 billion) increase in 
reserves was recorded as the result of a strong overall balance. In- 
creases in reserves in 1973 and 1974 were due mainly to loans and 
swaps. The precipitous fall in reserves in 1975 was due to the effects 
of very large current account deficits the previous two years combined 
with the unwillingness of the Italian central bank to allow the lira 
to float any loAver. 

2. FRAXCE 

Unlike the United Kingdom and the sterling area, current account, 
capital account and official reserves transactions balances are avaihible 
only for the entire franc area for 1955-67, not metropolitan France 
alone. In addition, because both current and capital account balances 
prior to 1968 include amounts for transactions made through France 
with the rest of the world by the rest of the franc area, the pre-1968 
accounts do not •'balance." A notation of the net amouiits of settle- 
ments made on behalf of the rest of the franc area by France appears 
l>elow the errors and omissions line. However, because of the closer 
relationship between overall balance-of-payments performance and 
changes in total reserves which existed prior to 1973, it is possible to 
make a fairly accurate assessinent of France's balance-of-payments 
performance for the entire period shown on the table. 

Current account 

Because they were not available from IMF sources, it was necessary 
to obtain f.o.b. trade figures for metropolitan France for 1955-57 from 
Bank for International Settlements annual reports. Because the BIS 
does not disaggregate unrequited transfers in the same format as the 
Fund, it was not possible to obtain a current account balance for these 
years. 

The growth pattern of French merchandise exports falls into three 
]^<Miods. Tlio franc A'ahu^ of exports rose quite slowlv from 1955 to 
1958 when the devaluation took place. For this period the average 
annual rate of growth was loss than 1 percent a year. From 1959 to 
1968, the rate of growth in the value of exports increased to an aver- 
acre of 13.6 percent a year. Then, from 1969 to 1975. the average rate 
of increase accelerated to 22 percent a year. Like Italy, increases in 
expoii; volume in the 1970-75 period were far less than the increavSes 
in value — the value of exports durine: the latter period increasincr 300 
percent while volume rrrew not quite 50 percent to 1974, the highest 
volume year. In the 17 years between the 1958 devaluation and 1975, 
France's trade balance was in surplus 12 years, and the net deficit for 
three of the remaining 5 years totaled only $285 million. The $1.2 
billion trade deficit recorded in 1969 was a direct result of the 1968 
disordei^. while the lartre J?v"5.8 billion trade deficit in 1974 was due al- 
most entirely to oil price increases. The $5.7 billion turnaround on 
trade account between 1974 and 1975 is quite remarkable. 



49 

AVliilo invisibles do not play as lar^o, (;r roliablo. a lolo in France's 
balance of payments as they do for Italy or Great Britain, tliey have 
provided an avora:>e siuplus of $310 million a year over the 21-year 
period on the table. Net investment income and a continnin;2r surplus 
from tourism have been major contributors to recent invisibles 
surpluses. 

France's balance of unrequited transfers has been in deficit since 
1967 primarily as a result of workers remittances sent abroad. This 
deficit is partly the mirror image of the positive contribution to the 
balance of payments of Italy (and other countries, especially Algeria 
and Spain) since France has historically been an employer of foreign 
workers. After having grown steadily for several years, the amounts 
of workers' remittances leveled out in 1973 and remained steady. The 
major reason for the plateau was the decreasing employment oppor- 
tunities for foreign workers, slightly more than otiset by wage in- 
creases. Since 1970, almost half of the deficit for unrequited transfers 
has been the result of French foreign aid disbursements. 

Capital account 

Because the current account was so deeply in deficit in 1956-57. it 
is not possible to extrapolate comparable capital account data from 
total reserves figures for the first 3 years on the table. After 1958, 
France's capital account was in surplus for 15 of the next 18 years. 
The unusual deficit in 1962 was partly the result of advance repay- 
ments by the French Government on long-term loans. The events of 
May-Ju]ie 1968 were reflected in the current account and capital ac- 
count deficits for that year, the latter due to large-scale transfers of 
short-term funds out of France. From 1970 to 1975, the capital ac- 
count was heavily in surplus except for 1973 when very large, over 
$7 billion, short-term captial outflows took place in the wake of the 
Arab-Israeli conflict and the Arab oil embargo. 

Official reserves transactions and total reserves 

From 1958 to 1975, France's official reserves transactions balance 
was in surplus 13 of the 18 years. Deficits on liotli current and capital 
account were covered through official transactions in 1968 and 1973. 
Deficits on current account alone were covered in 1969 and 1974. 

From 1958 to 1967, France's total reserves increased an average of 
$840 million a year, with exceptionally stroner growth registered from 
1961 to 1967. FbllowinjT the dislocations of 1968 and 1969. total reserves 
increased over $6 billion in the 1970-72 period — thousfh some of the 
increase in dollar terms was due to the appreciation of the franc rela- 
tive to the dollar. The 1973 decline in reserves was due to the desire of 
the French Government to maintain the exchange rate of the franc in 
the face of current and capital account deficits caused by the Arab- 
Israeli war and Arab oil embargo. The recovery of reserves in 1974. in 
spite of a very large current account deficit was a result of the Govern- 
ment's decision in January 1974 no lonjrer to intervene in the foreign 
exchange market on a compulsory basis, thus allowing the exchange 
rate to float down somewhat. The large increases in reserves in 1975 
were due almost entirely to the announced policy of the French Gov- 
ernment to value its gold holdings at market prices (then over $150 an 
ounce) rather than the $42.22 an ounce figure used by the IMF. 



50 






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51 

3. UNITED KINGDOM 

Current accov/nt 

Compared with Italy and France, the United Kin^^dom's export 
performance during the 21-year period on the table has been quite 
sluggish. It took 14 years, i'rom 1955 to 1969, for the value of tlie 
United Kingdom's exports to double, then another 5 years to double 
again. On a volume basis, export quantities closely followed value for 
the first doubling, but because of inflation, only increased 30 percent 
during the second doubling. 

The United Kingdom has consistently imported more than it has 
exported. The United Kingdom trade balance was in deficit all but 4 
of the 21 years on the table. In 8 of the 21 years, the deficit on trade 
account exceeded $1.5 billion, and for 19Y3-75, the deficit exceeded $5 
billion, largely due to higher raw materials and oil prices, but also 
because of imports of North Sea oil production related equipment. 

Certain categories of invisibles are extremely important to the 
United Kingdom's balance-of -payments performance. That the 
United Kingdom current account balance was in surplus for the 10 of 
the 21 years was almost entirely because of the contribution of re- 
patriated earnings to the large invisibles totals. Starting from a level 
of $450 million a year in 1955, investment income rose steadily, though 
irregularly, until it reached $1.1 billion a year in 1963. Except for 
1968. it then remained within the range of $1.1 to $1.4 billion a year 
for the next 10 years. In 1973 and 1974, investment income exceeded 
$3 billion a year, but then fell to $2 billion in 1975. 

Surprisingly, in light of the United Kingdom's longstanding mari- 
time dominance, the net contribution of transportation to invisibles 
was only $20 million over the 21-year period on the table. In fact, in 
half of the years the transportation item was in deficit. And, except for 
1968 and 1975, this entry never made a positive contribution exceeding 
$150 million a year. 

Since 1968, tourism has made a regular, but small — $20 to $100 mil- 
lion — contribution to the current account balance. The fact that tour- 
ism was a regular deficit item prior to 1968 is one indication of the 
effects of the decline of the value of the poimd from 1968 until 
recently. 

Unlike Italy, United Kingdom's unrequited transfers have been in 
deficit every year on the table. The main element, ranging from 70 to 
90 percent of the total, has been Government foreign aid contributions 
through bilateral and multilateral channels. For a country with fre- 
quent, and sometimes seA^ere, balance-of-payments problems, the 
amounts spent on foreign aid have been substantial. 

Capital account 

Except for 1961, the United Kingdom was a net exporter of capital 
every year from 1955 to 1969. Over that 15-year period, net capital out- 
flows averaged almost $600 million a year. The capital account deficit 
exceeded $500 million a year for 8 of the 15 years. After 1969, except 
for 1972, the United Kingdom's capital account was heavily in surplus, 
mainly due to large public sector borrowing overseas and private non- 
direct investment, a good deal of which was connected with North 
Sea oil exploration. 



52 

Q-fficial reserves transactions and total reserves 

The United Kingdom's official reserves transactions balance was in 
deficit 12 of the 25 years on the table, with especially large negative 
figures recorded in 1964, 1966, 1967, 1972, and 1974. One of the main 
reasons for the frequent need to use official reserves was the inabilitv of 
the current account to finance the continuing capital account deficits. 

An examination of the behavior of the United Kingdom's total re- 
serves from 1955 to 1975, excluding the large swaps and loans made in 
1971. shows that there were only four instances when total reserves 
rose 2 consecutive years in a row. From 1955 to 1970, a 16-year period, 
the net increase in the United Kingdom's total reserves was only $400 
million. In 1968, the year after devaluation of the pound, total reserves 
were only $30 million more than they had been 13 years earlier. For 
1973 and 1974, large public sector borrowings — which appear as a plus 
on capital account — helped United Kingdom authorities to weather 
current account deficits totaling $10.5 billion, though the exchange rate 
of sterling fell. 

TABLE III-9 
DOLLAR AND SDR EXCHANGE RATES OF THE LIRA, FRENCH FRANC, AND POUND STEPPING 
End of Period Indicated 

Italy France U.K. 





Lire 


Lire 


Francs 


Francs 


SDR 


Dollars 




Per 


per 


per 


per 


pe 


■X 


Per 




SDR 


Dollar 


SDR 


Dollar 


?0M 


md 


Po'jr.d 


1955 




624 






3.50 






2.£0 


1956 




624 






3.50 






2.75 


1937 




624 






4.19 






2.65 


1958 




620 






4.90 






2.60 


1959 




620 






4.90 






2.30 


1960 




620 






4.90 






2.60 


1961 




620 






4.90 






2.n 


1962 




620 






4.90 






2.5 3 


1963 




622 






4.90 






2. -9 


1964 




624 






4.90 






2.79 


1965 




624 






4.90 






2. £3 


1966 




624 






4.95 






2.79 


1967 




623 






4.96 






2. 40 


1963 




623 






4.94 






2.; 3 


1969 




625 






5.55 






2.41 


1970 


623 


623 




.52 


5.52 




,39 


l.ll 


1971 


644 


594 




.67 


5.22 




.35 


2. lb 


1972 


632 


582 




.56 


5.12 




.16 


2.:4 


1973 


733 


607 




.67 


4.70 




.92 


2.:: 


1974 


795 


649 




.44 


4.44 




.91 


2.34 


July 1975 


779 


630 




.99 


4.04 




.77 


2.19 


Dec 1975 


800 


683 




.25 


4.48 




.72 


2.c: 


July 1976 


963 


840 




.43 


4.74 




.55 


1.78 


Dec 1976 


1.016 


875 




.77 


4.96 




.46 


1.70 



Source: International Financial Statistics 



G. ExGJiANGE Kates 

Probably tlie only technical difficulties that are involved in examin 
ing the (\\('hange rates above would be to assume erroneously that tlic 



53 

figures indicated were anythiii<r but ond-of -period snapshots/ Fi-oni 
the beginninir of the Bretton Woods system until tlie dollar devalua- 
tion in Auo^ust 1971, oflicial niodifiration in exchano^e rates were infre- 
quent. Except when a devaluation o!' revaluation took place duriu<r <he 
period, they provided an accurati^ indication of exchan^^e relatioushif^s. 
It should be noted tliat prior to the devaluation of the dollar in 1971, 
its value and the value of the special drawing right (SDR) were the 
same. Immediately following the devaluation of the dollar, the value 
of the SDR was based on the gold parities of the two units; since July 
1974, upon a weighted average of 16 major currencies, inchiding the 
dollar. The SDR vahies on the table since 1071 are based on the cur- 
rent SDR "basket'- method of valuation. 

1. ITALY 

For Italy, the most remarkable thing about the table is the stability 
of the value of the lira from 1955 to 1972. This stability was a reflec- 
tion primarily of the strong current account balance which Italy had 
during those years except for 1963. And, excluding 1968 and 1964, the 
rate of inflation in Italy remained very low. After 1972, Italy's cur- 
rent account balance went into deficit and the rate of inflation in- 
creased markedly. In 1971, 1972, and 1973, the lira/dollar rate fell 
while the lira/SDR rate rose. This phenomenon took place because the 
dollar was depreciating against almost all major currencies, including 
the lira, while the lira was depreciating against the basket of curren- 
cies that provided valuation for the SDR. By the end of 1974, the 
dollar had recovered its strength relative to the lira, while the lira con- 
tinued to depreciate against the SDR. 

The impact of continuing poor trade figures, increased inflation, and 
the unsettled Italian political situation is reflected in the steadily 
falling lira/SDR exchange rate since 1973. The very rapid deprecia- 
tion of the lira in 1976 — it reached over 870 to the dollar several 
times — was a reflection of the continuing political and economic in- 
stability which existed in the country prior to and after the June 
parliamentary elections. Because the strong currencies — Swiss franc, 
deutschemark, Japanese yen — which contribute to the valuation of 
the SDR have appreciated relative to the dollar, there remains a sub- 
stantial difference between the SDR/lira rate and the dollar/lira rate. 
This phenomenon also appears in the French franc/dollar and pound 
sterling/dollar rates. 

2. FRANCE 

From the beginning of the Fifth Republic in 1958, until the floating 
exchange rate system in 1974, the franc was devalued twice. The first 
devaluation by General de Gaulle in 1958 soon after assuming the 
Presidency was a response to the poor trade figures of the previous 
several years. The second, in 1969, was in response to the economic and 



* Exchange rates indicate the relative demand for a particular currency In terms of other 
currencies. Thus, if, for example, the French are exporting increasing amounts of goods, 
or importing less, the buyers of the French goods will need more francs to pay for them, 
and the French will be providing fewer francs to pay for their imports. As buyers desire 
more francs, and less are provided by the French to pay for imports, the price of the franc 
relative to other 'currencies will be bid up. The opposite takes place if the French are 
selling fewer goods or importing more. Speculative flows aside, the exchange rate is one 
of the indicators of the international competitiveness of an economy. 



54 

political dislocations caused by the "events" of May and June 1968. 
The performance of the franc/SDR exchange rate between 1969 and 
1975 would seem to indicate that the 1969 devaluation was probably 
unnecessary and that the franc was undervalued, since this 6-year 
period included the effects of the 1972-73 worldwide commodity in- 
flation, the 1973-74 oil price increases, and the 1974-75 recession. 

3. UNriED KINGDOM 

The need to "defend the pound"' has been a major influence on 
British domestic and international economic policy over the last 30 
years. After the end of World War II, the sterling exchange rate was 
set at $4.03. Events were to prove this rate grossly overvalued and it 
was lowered to $2.80 in 1949. Between 1955 and 1971, when the dollar 
was devalued, the United Kingdom experienced balance-of-pavments 
crises in 1955, 1957, 1959, 1960, 1961, 1964, and 1967. These crises were 
reflected in the exchange rate onl}' once during that period, in 1967 
when the par value of sterling was lowered to $2.40. However, as noted 
in the balance-of -payments analysis in this chapter, the effects of these 
crises were expressed in deflationary United Kingdom budgets which 
transferred the costs of adjustment from the exchange rate to de- 
creased domestic economic activity. Thus, except for 1967, the pound 
was successfully "defended" for this 16-year period but at the cost of 
generating a stop-go cycle which severely hampered growth. 

Sterling has depreciated steadily against the SDR since 1971 in the 
wake of extremely high rates of inflation, continuous balance-of-pay- 
ments deficits, and sluggish real GNP growth. The steady decline of 
the pound in terms of the SDR gives an entirely different perspective 
to the rapid fall in the dollar/sterling exchange rate which took place 
in the spring of 1976 since the SDR rate clearly shows the continuous 
depreciation of sterling since 1971 rather than the "stickiness" of the 
dollar/sterling rate which had not fallen as dramatically in 1972, 
1973, and 1974. The recent appreciation of the pound does not appear 
on this table. 

H. Import Dependence 

The total import figures on this table will not coincide with those on 
the tables for balances of payments because the latter are on a f.o.b. 
basis, while those on this table are c.i.f .^ 

Also, as explained in the introductory'^ cautionary note, the conver- 
sion into dollar values from the reported national currencies contains 
within it the potential for misunderstanding, especially in the very 
recent past where exchange rate variations have combined with high 
inflation. However, the relationships between the four categories will 
remain the same i-egardless of the national currency chosen. Some 
rather significant long-term changes in these relationships appear in 
this table. 



<"' F.o.l). staruls for "free on l)oar{l" and Includes the actual export value of the commodity, 
r.i.f. stiiiids for cost, insurance and freight, and more accurately ni)proximates the total 
cost paid t)y tlie Iniixtrter. I( is easier to keej) tracl< of tlie values of imports on c.i.f. hasis 
because the i»ayments to importers and shippers can be recorded as part of a sinjrle trans- 
action. On the other hand, for evports, the value f.o.b. is most readilv availal)le to the 
exportinj; country. whi]« the importing country would be in tl»e best jmsition to know the 
Insurance and freight costs associated with the particular shipment. 



55 



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56 

The four standard industrial trade categories on the table were 
chosen because they provide a fair presentation of those areas of im- 
port dependence which would most seriously constrain the activities of 
the importing country if they were interrupted. Food and live animals 
are included because of the historic dependence of the United Kingdom 
on food imports and because of the recent increases in imports in this 
category to Italy. 

The inclusion of mineral fuels, including crude petroleum and prod- 
ucts, requires little further explanation. Raw materials — copper, baux- 
ite, iron ore — and semiprocessed manufactures — iron bars, alumi- 
num shapes, copper wire — are included because they provide the work- 
ing stock for the relatively resource-poor advanced industrial coun- 
tries to process into exports. 

Probably the most significant informxation contained on the table 
above emerges from calculations for all three countries of two types of 
relationships : those among the four import categories for each coun- 
try, and those bctAveen the totaJg for the four import categories and 
total imports. 

Before examining these relationships in detail for each country, it 
should be emphasized that the absolute amounts spent by all three 
countries has increased substantially since 1955. From 1955 to 1972, the 
value of total imports to the United Kingdom increased about three 
times, for France about five times, and for Italy about nine times. The 
rapid increases in commodity prices since 1972 make value compari- 
sons less useful as an evaluative tool since the fairh^ close price/ 
quantity relationships which existed in earlier periods were broken. 

1. ITALY 

Of the three economies with which we are concerned, the in- 
crease in the value of total imports (and exports for that matter) for 
Italy has been by far the greatest. From a level of $2.7 billion in 1955, 
imports into Italy increased in value over 15 times by 1074 and then 
fell back slightly m the recession of 1974-75. The situation with Italy's 
dependence ratio is definitely mixed. Since 1955, imports of com- 
modities in the four categories had fallen as low as 63 percent of total 
imports in 1972, but because of the increases in fuel prices they in- 
creased to 07 percent in 1975— higher than the dependence ratios of the 
United Kingdom and France by 7 and 10 percent respectively. Al- 
though Italy has a very large agricultural sector, imports of food and 
live animals have consistently comprised significant portions of the 
country's total imports. These have ranged from 15 percent of total 
imports in 1955 to 20 percent in 1966 and down to 16 percent in 1975— 
the latter percentage heavily influenced by the increase in oil imports. 
Italy's performance in this area compares rather unfavorably with 
that of the United Kingdom. 

2. FRANCE 

Because of the strength of French agriculture, food imports have 
not been nearly as significant to France as they have been to the United 



57 

Kingdom. In 1955, food and live animal imports were only 10 percent 
of total French imports; for the last years indicated on the table, 
they have averaged slightly more than 10 percent of total imports. For 
France, the ma]or import category in 1055 was raw materials, com- 
prising 28 percent of total imports. While total imports had increased 
in value over five times between 1955 and 1975, raw materisils imports 
had slightly more than doubled in value, and now comprised only 7 
percent of "total imports. However, during the same period, semi- 
processed manufactures increased as a percentage of total imports 
from 12 to 20 percent. Like the United Kingdom, the dependence ratio 
of France has fallen steadily since 1955. In 1955 it was 73 percent of 
total imports. By 1973 it had fallen to 53 percent— lowest of the three 
countries. But, "because of the rise in the mineral fuels category, it 
increased to 59 percent in 1974, and then fell again in 1975 to 57 per- 
cent. However, unlike the United Kingdom, the mineral fuels category 
wiU most likely continue to remain high because of France's depend- 
ence on petroleum imports. And, the secular upward trend in semi- 
processed manufacturers Avill also most likely continue. 

3. UNriED KINGDOM 

One of the most striking general observations which can be made 
from the table is the very slow growth rates of imports of all four cate- 
gories into the United Kingdom between 1955 and 1970. Over that 15- 
year period, imports of food and live animals remained practically 
level; in real terms they declined. Only imports of fuels and semi- 
processed manufactures increased any significant amounts during this 
period. 

In 1955, over 36 percent of total imports into the United Kingdom 
consisted of food and live animals, and another 27 percent was raw 
materials, excluding mineral fuels. The four import categories on the 
table comprised 85 percent of all United Kingdom imports in 1955. 
Since then what we choose to call the dependence ratio — namely, the 
degree of reliance of a country on imports of primary products in these 
four categories — for the United Kingdom has fallen dramatically. 
Though distorted by the effects of the recent increases in fuel prices, 
oil as a percentage of total British imports dropped from 85 to 60 in 
1975. This figure will surely continue to decrease as North Sea oil 
supplants imports from other regions. And, while also skewed because 
of the increases in fuel import prices, the percentage of total British 
imports comprising food and live animals has decreased from 36 in 
1955 to 16 in 1975. Even though food consumption generally increases 
slowly along with rising income, then levels out, this shift in imports 
indicates a very significant increase in agricultural self-sufficiency for 
the United Kino^dom. 



20-866—78- 



IV. COUNTRY SURVEYS* 

A. Italy 

1. POSrVVAR ECONOMIC de\t:lop]mext 

From 1949 to 1970 Italy experienced a 21-year period of economic 
growth interrupted only by a recession in 1964^65. With real growth 
rates of 5.5 percent in 1950-60 and 5.2 percent in 1960-70, it had the 
second most rapidly developing economy in Europe.^ 

In the 1970's, however, Italy has confronted serious problems. Soar- 
ing wages, inflation, budget and balance-of-payments deficits, and 
increasing unemployment brought the country's solvency into question. 

a. The Italian takeoff 

Italy began its period of growth at a very low level. Its per capita 
income in 1950 was only $290. Even after postwar foreign aid of some 
$3.5 billion, it remained a poor and backward country. The primitive 
conditions of the south and the poverty of northern v>^orkers employed 
in small enterprises or in agriculture remained sources of serious eco- 
nomic weakness. 

Italy's economic recovery was led by a group of advanced manufac- 
turing companies in northern Italy such as Fiat, Olivetti, and Monte- 
catini. Modernized in the postwar reconstruction period under the Mar- 
shall plan and supplied with cheap labor, these companies were able to 
produce highly competitive exports. Moreover, they commanded strong 
government support because substantial exports were needed to finance 
the importation of basic raw materials such as timber, coal, iron 
ore, and petroleum, all in short supply in Italy. Backed by a polic}' 
of sound money and free trade, Italy's exports grew by 10.7 percent 
a year in 1950-61 and 12.1 percent a year in 1962-72. Its record was 
surpassed only by West Germany and Japan in 1950-61, and over the 
entire 1950-75 period only by Japan among the industrialized coun- 
tries. An illustration of the success of Italian industr}^ in improving 
its efficiency is the fact that during the 1950's Italian average annual 
export prices fell 0.5 percent while the prices of all its European com- 
petitors except Switzerland rose between 0.5 and o.l percent.- Competi- 
tive pricing, quality, and an ability to meet delivery dates and provide 
aftersales services exi)lained the Italian achievement. 

Italy's earnings from exports, tourism, and emigrant remittances 
between 1960 and 1970 enabled the country to build up by 1971, gold 
and foreign currency reserves of $6,820 million which Avere among the 
hirgest in Europe. 

•This section was written by Edward T. Lampson. 

1 Allen, Kevin and Andrew Stevenson, "An Introduction to the Italian Economy," Ne>fr 
York, Harper & Row, 1975, p. 4U. 

- Il)i(l., p. 8.\ 

(58) 



59 

b. The support of a strong goverrument 

The development of the economy in the 1950's was greatly aided by 
the strong- governments of Christian Democratic Prime Minister Al- 
cide de Gasperi (1045-53), the outstanding Italian statesman of the 
postwar period. His government favored the restoration of a market 
economy operating within the framework of freer international trade. 
The policy that began to develop under his leadership "involved the 
building up of a mixed capitalistic economy, in which private enter- 
prise, competition, and the market mechanism were to play major 
parts, but Avith the state by no means in a passive role." ^ The govern- 
ment also supported independent unionism, collective bargaining, in- 
creased welfare benefits, extensive public housing, and aid for the de- 
velopment of the south. After de Gasperi's withdrawal from politics 
in 1953 and death in 1954, a series of Christian Democratic Prime 
^linisters continued the main lines of the de Gasperi policy through- 
•out the 1950's. 

t?. The role of Italian labor 

In the early 1950's Italian skilled labor was plentiful and wages 
•low. During the decade industrial wages increased at an annual average 
Tate of 4.1 percent while industrial productivity rose by 5 percent.* This 
differential made it possible for Italian manufacturers to expand and 
improve their operations. In view of the limited nature of the Italian 
capital market, the plowing back of export profits was an essential in- 
gredient in the modernization of export industries. It was not until 
the end of the decade that the labor market tightened, setting the stage 
for wage increases in the early 1960's. 

d. The international labor migration 

The late 1950's and the 1960's were marked by important social re- 
percussions caused by the giilf between northern Italy's thriving in- 
dustry and the state of affairs in the rest of the country, both north 
tind south, where there was often widespread underemployment, primi- 
tive living conditions, and near-subsistence wages, particularly in 
-agriculture. Beginning in the 1950's, a massive migration from farm 
to cities, and particularly from south to north, took place. Between 
1951 and 1971, net migration from the south to the north was 
4.1 million.^ Eoughly a million more moved from northern farms 
to the cities. The great bulk of this unskilled labor found little 
in the way of effective employment, and was forced into emigration 
or unproductive employment in handicrafts or services.^ Of this num- 
ber, 2.351,000 emigrated abroad, mainly to northern Europe, between 
1951 and 1971.^ 

The internal migration created increasingly serious social problems 
which Italian Governments still have not dealt with effectively. Slums, 
trafRc congestion, inadequate schools, overcrowded health facilities, 
the breakdown of public services, pools of unemployed or underem- 
ployed persons, a generally poorer quality of life even for those who 



3 Hilflpnbrand. Georgre H.. "Growth and Structure In the Economy of Modern Italy" 
Cambridge. Mass., 1977, p. 37. > . . 

< Allen, op. clt., p. 57. 

5 Allen, op. clt., p. 308. 

s Kindleberger. Charlps P.. "Europe's Postwar Growth : the Role of Labor Supplv." Cam- 
^rid-p. Mass. 1977. p. R7. 

' Allen, op. clt, p. 111. 



60 

had found satisfactory employment, and the failure of wage scales 
to keep up with living costs created more and more intolerable condi- 
tions. 

e. The opening to the left 

These social changes coincided with a shift in the balance of Italian 
politics. The center of gravity in the Christian Democratic Party was 
moving from its conservative business-oriented wing to its left 
wing. In part this was in response to the mounting problems created 
by the internal migration. In part it reflected changes occurring within 
the Catholic Church, where a movement was developing which favored 
a more active and socially conscious policy toward tlie poor. Under 
Pope John XXIII the Vatican no longer took the lead in denouncing 
cooperation between the DC and parties to its left. 

In 1958 DC party secretary Amintore Fanfani took the first, but 
short-lived, step toward forming a coalition with the left. He in- 
cluded Social Democrats in his cabinet on the basis of a pledge from 
the Socialists of support in Parliament. In 1963, Aldo Moro took the 
further step of forming a cabinet which included the Socialists (who 
for many years had run in elections in alliance with the Communists). 
From 1963 to 1972, Social Democrats and Socialists participated in 
Italian cabinets except for brief periods. This 9-year period of DC- 
left coalitions had a significant effect upon Italian social and economic 
policies. 

/. TTie decade of the sixties 

Italy's long steady growth was interrupted by a wave of wage in- 
creases, inflation, and recession in the early sixties. 

In the fifties. Italian trade union leaders had been concerned more 
with political issues than with wage negotiations. However, in the early 
sixties changes in outlook and tactics took place. They were furthered 
by the establishment of direct negotiations between employers and em- 
ployees on the factory level and by the emergence of more militant 
local labor leaders. Concurrently a tightening of the skilled and semi- 
skilled labor market strengthened the unions' bargaining position. 
(The percentage of uneiuploved males had fallen from 8 percent in 
1954 to 2.6 percent in 1964).^ In 1962-63 trade union leaders launched 
an agirressive and successful campaign for higher wages. The lead 
taken l)v state-controlled industries in agreeing to large increases early 
in the negotiations played an important part in the generous character 
of the overall wage settlements. In 1962-63, labor earnings increased 
18.5 percent and 11.8 percent in the following year. Productivity 
(value added per employee unit) increased only 3.2 and 2.6 percent 
in these years.^ 

Partly as a result of the wage explosion, consumer expenditure at 
constant prices rose by 9 percent in 1963. The higher purchases of both 
for(Mgn and domestic consumer goods contributed to a balance-of- 
payments deficit of $715 million, a swing of almost $1 billion compared 
to the preceding year. 

The Croveinment reaction was to resort to a restrictive monetary 
policy which drove the economy into a severe recession, intensified by 

*■ Mlon. op. rif.. p. 100. 
" \\)U\., p. 124 



61 

floods in the noi*th. Fear of increasinfr labor costs, a stock cxchan^o 
crisis, and a 15-percent tax on dividends exacerbated investors' lack of 
confidence in the Christian Deiiiociatic-Social Doinociatic-Socialist 
government. 

Although there was a relatively swift recovery in Italy's balance of 
payments and export position, largely because of a strong foreign 
demand for Italian goods, industrial investment failed to recover from 
the 1964-65 recession. Between 1964 and 1972, gross industrial iixed 
investment grew in real terms at an annual rate of only 1 percent com- 
pared with 9.1 percent for the period 1952-63.^" 

g. The 1969 strikes 

By 1966, the Italian economy had recovered strongly and was enter- 
ing a boom period. But the boom was terminated by a second wage 
explosion in 1969. 

In order to reestablish their competitive position after the rise of 
unit labor costs in 1962-63, Italian manufacturers had been stepping 
up the pace on the assembly line and working their employees for 
longer hours, often under conditions of physical danger and psyclio- 
logical stress. When the time came to renegotiate wage contracts, which 
usually ran for 3 years, labor negotiators were prepared to back up 
their demands by a series of long strikes, which broke out in the 
autumn of 1969. As a result, 37 million working days were lost in that 
calendar year, compared to 9 million the preceding year. 

In addition to higher wages, workers were striking for improve- 
ments in working conditions, shorter hours, and longer vacations. The 
strikers' belligerency brought them into conflict wdth the authorities, 
as well as their employers, in protests against inadequate transporta- 
tion, poor and overpriced housing, and the lack of decent schools and 
hospitals. The strikes thus represented a reaction to the failure of the 
Italian Government to deal with the consequences of the Italian mass 
migration. 

In the aftermath of the 1969 strikes, minimum contractual wages for 
industrial workers increased by 20.7 percent in 1969-70 and by 11.9 
percent in 1970-71." 

A. The impact on Italy'^s competitiveness 

Under the pressure of rising wages and shrinking profits, Italian 
manufacturers, through the 1960's, did not maintain the rate of invest- 
ment achieved in the 1950's. The OECD has commented that "the main 
hope of Italian exporters lies in their comparative advantage in labor 
costs. In this respect, however, the margin that Italian firms enjoyed 
vis-a-vis their main competitors has dwindled considerably, and com- 
petition from less developed countries * * * is steadily increasing." ^^ 

Suffering from the consequences of the wage explosion of 1969, a 
sharp drop in foreign demand, and the stagnation of private invest- 
ment, the Italian economy in 1970 fell into a 3-year recession. In 1971 
and 1972, the Italian real GXP growth rate was only 3.0 and 1.9 per- 
cent, respectively.^^ 

"Ibid., pp. 64-65. 

"Ibid., p. 117. 

" OECD Survey on Italy, January 1975, p. 43. 

" See table III-l. 



62 

i. The decade of the seventies 

The rise in the price of raw materials, especially oil and food, in the 
early 19T0's. hit Italy particularly hard because it imports 75 percent 
of its energy requirements from the ^Middle East and depends on im- 
ports for many of its industrial raw materials and food specialties. 
The impact of increased oil prices alone on Italy's balance of payments 
has been estimated at almost $8 billion annually. The effect of the 
global recession of 1974-76 was particularly severe because the drop 
in foreign demand deprived Italy of export earnings. 

Initially Italian officials decided upon an expansionist policy to 
stimulate the economy. This added to the foreign trade deficit and 
intensified inflationary pressures. ^"^ 

The escalator clauses built into Italian wage agreements, which were 
considered sacrosanct by Italian labor and the Socialist Party, con- 
tributed greatly to these pressures. 

By 1973, Italy had inctirred a trade deficit of $3,950 million and the 
government reversed its traditional policy of free trade. In April 1974. 
it required importers to ^'invest" 50 percent of their foreign exchange 
requirements in a special noninterest-bearing account at the Bank of 
Italy. It also placed a tax on numerous imported goods. This later 
measure, which was contrary to European Community policy, served 
to reduce the volume of imports by roughly 30 percent between 1974 
and 1976. 

j. A worsening situation 

In !March 1974, the Government took another step to improve its 
trade balance : it allowed the lira to float freely. This decision tempo- 
rarily moved the trade balance back toward equilibrium. But Italy's 
economic situation continued to worsen and the Government resorted 
to heavy foreign borrowing. (See section II D above.) 

Ic. The Andreotti government 

After the June 1976 elections, Giulio Andreotti became the Prime 
Minister of a minority Christian Democratic government. Andreotti 
was faced with the problem of reestablishing Italy's solvency in the 
face of an annual inflation rate hovering around 18 percent and a trade 
deficit of $574 million at the time of the elections. Dependent upon 
parliamentary support — or at least abstention — from the Conuuunist 
and the Socialist Parties, Andreotti faced a difficult task in putting 
together an austerity program upon which Italy's foreign creditors 
were insisting as a prerequisite for additional foreign loans. In Sep- 
tember 1976, the Government launched an austerity program designed 
to dampen demand. It called for higher public utility charges, price 
increases, higlier indirect and direct taxes, and a freeze on cost-of- 
living allowances for highly paid persons. Tax receipts rose, partly as 

^*By niifM97.1, the rate of innation exceedpfl 10 percent and was rising; strndlly. 



63 

a result of reforms in the metliods of tax collection. The Government 
also reduced the the impact of increasing labor costs by takin^: over 
some of the employers' contributions to the social security system. 

In a campaio:n in the sprinc: of 1977 to increase revenue and reduce 
inflation, the Government endeavored to curl) tax evnsioji by using 
banks as collection afirents and by examining company books. It a^rain 
raised taxes on higher incomes, enforced more strictly real estate and 
capital ^ains taxes, and placed additional value added taxes on im- 
ported consumer goods. The Government program called for reduc- 
tions in public sector expenditures and concentration on such job- 
creating programs as roads, housing, schools, and other types of con- 
struction rather than social expenditures. Top Government salaries 
were frozen and new programs cut back. There were other plans for 
renegotiating existing foreign debts, promoting energy conservation 
programs, and progressively reducing cost of living allowances for 
medium- and high-wage earners. The Italians hoped for a booming 
tourist season to help bring their current account back into balance.^^ 

Italy had a record production year in 1976. It achieved an annual 
5.6 percent real growth rate in gross domestic production but analysts 
expect that Government's stabilization program will slow the growth 
rate down to about 3.4 percent or less for 1977. 

Some encouraging signs have appeared. Agreements were reached 
during 1976 by the unions and industry, and also the Government, to 
reduce labor cost increases from 28 percent annually in 1975 to about 
16 percent in 1977.^^ Foreign exchange controls remain restrictive and 
domestic credit tight. There are hopes that unemployment may de- 
crease slightly below the 3.7 percent level of 1976. The lira exchange 
rate was held steady since April 1977 although it declined some 24 per- 
cent below its January 1976 level. The Government has succeeded in 
making some progress with the trade unions with regard to indexing. 
The latter agreed to some changes in the choice of items upon which 
the index governing wage increases is based.^^ 

The performance of the Andreotti government sufficed to reassure 
the international banking community that Italy was creditworthy. In 
April 1977, the International Monetary Fund approved a standby loan 
to Italy of $530 million based on a letter of intent which took note of 
the Government's stabilization program and the European Community 
approved a $500 million loan to offset Italy's repayment to the United 
Kingdom in 1976 of the British share of a EC's medium -term loan.^^ 
Both loans are predicated on the assumption that Italy will bring 
down its inflation rate by the end of 1977 to about 16 percent from the 
22-percent rate reported in January and limit its budget deficit and its 
monetary supply. News reports indicate that in October 1977, the cur- 

15 The Wall Street Journal, Apr. 15, 1977. 

1* The Government agreed to reduce employers' social security contributions in industry 
and to finance the cost of the State budsret through an increase in VAT on nonfood productg 
and by raising the prices of energy products. OECD Economic Outlook, vol. 21, July 1977, 
p. 12.S. 

" American Embassy, Rome. Foreign Economic Trends and Their Implications for the 
rnltPd States — Italy, May 1977, p. 4. 

18 Ibid., p. 6. 



64 

rent rate of inflation had dropped to 12 percent. Exports were runninof 
about 10 percent higher than in the preA^ious year.^^ With tourist and 
foreign remittances on the rise, OECD analysts in July considered 
there is a prospect that Italy's current account may be close to equilib- 
rium before the end of 1977 or by the beginning of 1978.-^ However, 
the resignation of the Andreotti government on January 16, 1978, re- 
vealed the precarious nature of Italian politics, subjected as it is to 
severe social and economic pressures (see p. 69) . 

2. SELECTED IXSTITU-nONAL FACTORS 

a. The managerial cla^s 

The reconstruction period after World War II gave able, ambitious, 
and energetic men in Italy an opportunity to build up their businesses 
or found new ones at a time when the Government placed few restric- 
tions on profitmaking. It was an atmosphere which encouraged 
modernization and ethcient management. In some cases the creators of 
industrial empires were heirs to established businesses dating bade to 
the early days of reunification of Italy, such as the Agnellis of Fiat, 
the Pirellis (tire manufacturers), and the Olivettis (office machines). 
Others were self-made men like Guido and Lino Zanussi whose father 
opened a workshop for the production of wood-burning stoves which 
was expanded by his sons into Europe's largest manufacturer of house- 
hold appliances. 

Italian management tends to be highly centralized with the presi- 
dent-director of the firm keeping policy decisions in his own hands. 
There has been a tendency to reduce the role of the family and to de- 
pend more and more on professionally trained technocrats. 

Italian employers have encouraged the development of a corps of 
highly trained technocrats by providing extensive training of new em- 
ployees. Many Italians aspiring to top business jobs have gone to the 
United States or Great Britain for training in such schools as the 
Harvard Business School, the California Institute of Technology, and 
the London School of Economics. In Italy there has been the same em- 
phasis on the im])ortance of sound technical training as in France. 

With the exception of some men like Gianni Agnelli, Italian busi- 
ness managers have generally tried to limit severely the activities and 
power of organized labor. It was not until 1970 that employers were 
required by law to recogTiize the right of unions to operate within 
firms — a right wdiich they had never acknowledged before. Recently 
em])loyers and trade union loaders seem to have negotiated agreements 
with less friction than in the past. 

The organization representing the Italian managerial class is the 
Confc.derazlone Gene rale dclVhidxiHiria ItaUarm (Confindustria). Im- 
mediately after World War II its relations with the Government were 
close but its influence diminished in later years. Today the organiza- 
tion is chiefly the representative for medium and smaller sized private 
iirms. The organization numbers over 500 on its staff. 

Z>. The trade uiiJons ^^ 

Italian trade unions that had been established bi^foio AVorld War II 
were taken over by the fascists and ti'ansformed into airencies of the 



"• Tho Washlncton Posf. Oct. 2, 1977. p. Fl. 

^"()K('I) Kronomlo Outlook. July 1077. p. 126. 

^ This section Is based on AlUii, op. clt., pp. 131-144. 



G5 

corporate stjite. Witli tlio collapse of fascism it was necessary to create 
a new unified trade union or<j^anization alon^ democratic lines. The 
Conjederazlone Gemrale Italtana del Laroro ((XML) was founded in 
1944. The new oro^anization included men of all political affiliations, 
although it was dominated by the Conununists. P>ut by 194S {)olitical 
views in Italy liad become so ])olarized tliat the (XrIL split into three 
independent confederations. The Catholics were the first to leave in 
1948. They set up the Libera Confederazlone Generale Itallana del 
Laroraforl (LCGIL). In the next year the Social Democrat and Re- 
publican groups followed suit. They founded the Federazione Itallana 
del Lavoro (FIL). But 1 year later LCGIL and FIL amalgamated to 
form the Confederazlone Itallana Slndacatl Lavoraf or I (CISL). Two 
small rightwing labor groups also formed confederations : the Unlone 
Itallana del Lacoro (UIL), representing a small anti-Catholic group, 
and the neofascist Confederazlone Itallana. Sindacatl Nazlonali dei 
Laroratorl (CISXAL). The total membership of Italian trade unions 
is no more than 5 million out of a labor force of 19 million. 

Throughout the 1950's the structure of the unions took form. Each 
confederation organized unions for each industry and below these 
wei-e provincial and local unions.-- At this time, and indeed for 
much of the postwar period, wage bargaining was highly centralized 
with national industry unions negotiating with national employers' 
associations. Plant bargaining was rare and in some sectors non- 
existent. 

The practice of bargaining at the plant level began not with union 
officials but with the Avorks councils {commhslone interne) which Avere 
elected by all employees in a factory. Many, but not all, of the members 
were union men. The councils were responsible for enforcing national 
agreements, settling disputes, and supervising factory rules. However, 
by the late 1950's some works councils began to negotiate wage settle- 
ments with their employers which gave them better treatment than 
that obtained by their national unions. The ineffective performance of 
the national union bureaucrats resulted in a shift to local plant bar- 
gaining — a change which was not completed until the end of the 
1960's.23 

An important step in this transition was made by the metal workers. 
They achieved recognition for the principle that "national unions 
would negotiate for minimum Avage rates, hours of work and occu- 
pational classifications, w^hile plant level negotiations would cover 
piece rates, job evaluation and productivity bonuses." ^* This arrange- 
ment led to a double system of wages with pay in individual plants 
often being considerably higher than the national minimum. 

In 1969, another important step in union organization occurred. 
In that year — partly in response to the example of the French up- 
risings of May-June 1968 — Italian labor was in an aggressive mood. 
Many shop floor leaders, elected to factory committees as delegati by 
all the employees in the factory, w^ere leftists w^ho urged union leaders 
to strike for high wages and improved working conditions. A large 
number of strikes took place and they were accompanied by con- 
siderable A^olence. The results were very generous increases in wages 



22 Ibid., p. 133. 

23 Ibid., p. 133. 

24 Ibid., p. 135. 



66 

and the passage of a law in May 1970 which recognized the right of 
unions to operate within firms. The law specifically provided that, upon 
the initiative of the workers trade nnion, representation may be estab- 
lished in each productive unit.^^ But nothing was said about bar- 
gaining powers. It still remained unclear whether the unions would be 
able to control the representatives of the factory committees. 

Steps were also taken to free the unions from control by the political 
parties. A checkoff system for collecting union dues by deductions 
from wages made the unions largely financially independent. A fur- 
ther weakening of political connections was the acceptance by the 
unions of the principle that ^'the holding of political posts was in- 
compatible with trade union office." ^^ 

Steps were also taken in the early 1970's to unify the movement. A 
federation was formed of which all four major confederations are 
members. Tlie political links of the individual unions still remain 
strong but the new federation appears to be a further step in the 
direction of depolitization. 

This process may reduce the influence of political parties. For 
example, the attempts of the Italian Communist Partj^ to moderate 
the demands of the CGIL for higher wages have clashed with the 
determination of labor radicals to press for higher wages irrespective 
of the general economic consequences of such an action. 

c. The civil service ^^ 

The Italian civil service numbers between 235,000-250,000. Of this 
total about 40,000 hold policymaking jobs. Recruitment is by competi- 
tive examination. The examinations for the top branch of the service, 
the administrative service, are heavily weighted in favor of legal 
training. Only in 1970 was legislation passed to set up examinations 
to test technological and scientific skills. The administration of the 
selection system is cumbersome ; applicants may have to wait from 1 
to 3 years before admission; entrance pay is low. It is a system to at- 
tract the legalistic person seeking security. Thus, critics maintain that 
the contents of the examinations and the way they arc administered 
fail to attract high caliber candidates with an ability to handle the 
needs of a modern industrialized state. Moreover, some positions are 
filled without examination. For example, certain posts in the higher 
civil service (e.g., prefects, directors general of directorates within a 
ministry) can be filled by presidential decree on advice of the cabinet. 
Temporary appointments not subject to examination can be made 
permanent. 

The civil service has been used as a method of absorbing tlie educated 
uneniploved. pai-ticulai'ly fi'om t1ie soiitli. This played an important 
part in shaping the character of the civil service, especially its size and 

-»Tb1(l.. p. i.-^T. 
="11.1^., p. i?.n. 

"This soctlon Is bnspd on a report on the Italian civil service contained In "History 
of rivil Sorvicp Merit Systems of the United States and Selected Foreijjn Countries together 
■with Kxenitlvp Reorcranl/ation Studies and Personnel Recommendations" compiled by 
thf I.llirary of Conpress Conpresslonal Research Service for the Subcommittee on Manpower 
and rivll Service of the Committee on Post Office and Civil Service, House of Representa- 
tives, 95th Cong., 2d sess., Dec. 31, 1976, pp. 411-437. 



67 

its emphasis on tenure and security.^'' Commenting on tlie number of 
southerners in the higher civil service, Professor Zariski wrote : 

Thus while the French higher civil servants are from the most dynamic, eco- 
nomically developed part of France, the Italian higher civil servants stem largely 
from the most backward and tradition-bound regions of Italy."'' 

The Italian civil service has been described by Prof. Kevin Allen 
as follows : 

The civil service is inflexible, overstaffed and poorly trained, with promotion 
resting heavily on seniority. Starting pay is low, often resulting in poor quality 
recruits though in many respects the civil servants are in a privileged position. 
Compared with their counterparts in private industry, civil servants enjoy far 
better pension arrangements, are almost impossible to dismiss, receive remark- 
able "golden handshakes" when leaving the service and have better family al- 
lowance systems, longer holidays, and shorter hours. At the top, appointments 
are largely political. At all levels the service is heavily and increasingly staffed 
with southerners, with their associated traditions. Italy is a country with a 
European majority governed by a Mediterranean minority. The South dominates 
the administration and imprints on it two traditionally Mediterranean habits 
of mind : a profound suspicion of the public and a belief that public office is a 
benefice rather than a public service. Cooperation with the public is indeed very 
poor, as is interministerial and interdepartmental cooperation — common in many 
countries but carried to extreme, and often superficially amusing, degrees in 
Italy. Bribery and corruption are present in the service, though some of it, 
especially at the lower levels, is merely an attempt to speed up a decision. There 
is little evidence that this particular problem has become less widespread in 
recent years.'*" 

The delays and ineffectiveness of the Italian administration are due 
as much to the administrative system as to the administrative person- 
nel. Even minor decisions must be checked and rechecked to establish 
that the action in question complies in all respects with the spirit and 
letter of the authorizing legislation. Expenditures must be approved 
by ''a subsidiary branch of the General Accounting Office, registration 
by the Court of Accounts, consultation with the Council of State for 
all contracts above a certain sum, and so on." ^^ As a result appro- 
priated funds are often not spent under this cumbersome system. 
"There is hardly a ministry or department in Italy which, through 
administrative problems, does not have substantial residui passivV 
These are funds, often enormous, voted to departments and not spent.^^ 

Overcentralization is another impediment to effective action. Many 
of the programs or specific acts of local authorities must be sent to Rome 
for review and approval. This often results in long delays. Even where 
laAvs and decrees provide for delegation of authority to subordinate 
officers or offices, ministers often insist on keeping control over petty 
decisions. 

In view of the large role of the Italian Government in the economic 
affairs of the country, the caliber of Government officials has an im- 
portant influence on economic development. Italian state holding com- 
panies exercise control over a larger part of industry than is the case 
in any other non-Communist country in Europe. The largest company, 
IRI Instltuto j)er Ja Ricostruzione Industr'ude) manages operations 
in iron and steel, metalworks, shipbuilding, shipping, and telecom- 

-Ml>i(l.. p. 4a6. 

-9 Zariski, Raph.iel, "Italy : The Politics of Uneven Development," Hinsdale, 111., the 
Dryden Press, 1972, p. 255. 
•5" Allen, op. cit, pp. 21-22. 
31 Zariski. op. cit., pp. 284-285. 
22 Allen, op. cit., p. 22. 



68 

mimications. It lias direct control of airlines, radio and television, and 
three banks. The second largest, ENI {Enfe Nazionale dei Idrocar- 
huri)^ produces petroleum products, petrochemicals, nuclear energy, 
and textiles. The overall directives for these holding companies are 
laid down by an interministerial planning committee which prepares 
plans for the Government along the lines of the French national plans. 
The Italian state holding companies involve a mixture of public and 
private investment but the state holds the controlling interest. They 
are allowed to operate more freely than a government ministry. Their 
employees are not chosen through the civil service mechanism and are 
often of high caliber and technically qualified for the jobs they per- 
form. But inevitably politics plays a significant influence in their selec- 
tion. This point was made in 1*972 by Guido Carli, governor of the 
Bank of Italy. He wrote : 

The circle of eligible citizens tends to become restricted to militants of political 
parties of the majority, and in this way a bureaucratized entrepreneurship is 
•created which has but limited leanings towards innovation. The extension of the 
public sphere ends up by favoring the group which can more easily bend the 
discretionary power of the executive to its own ends.^* 

d. Governmental stability 

The current prime minister, Giulio Andreotti is the 39th consecutive 
Christian Democratic Prime Minister since the founding of the Italian 
Eepublic in 1946. 

Over the years the political strength of the Christian Democratic 
party has diminished. The party has let its popularity slip away owing 
to its inability to revitalize its leadership, its reported reputation for 
inefficiency and corruption, its failure to deal with Italy's economic 
problems, and its alleged refusal to initiate social reforms popular with 
the Italian electorate. The decline was accelerated by political errors, 
such as the determination of the party chairman Fanfani to press for 
referenda on divorce and abortion only to lose heavily when the voting 
went against the party's position, which opposed the removal of bar- 
riers to divorce and abortion. 

The election of June 1976, brought about by the withdrawal of So- 
cialist support from the Christian Democratic minority government of 
Aldo Moro, illustrated the decline of the Christian Democrats strength 
and the advance of the Communists. Although still the largest vote 
getter, the Christian Democrats fell far short of a majority. The per- 
centage vote in the June 1976 election for members of the Chamber of 
Deputies was as follows : 

JUNE 1976 ELECTION FOR THE ITALIAN CHAMBER OF DEPUTIES ^ 

Percentage 

Party of t^^ "^ote Seats 

Christian Democrats 3S. 7 26.^ 

Communists 34.4 228 

Socialists i). « f>7 

Italian Social Movement (MSI) 'fi. 1 3.') 

Social Doniocrats 3. 4 lo 

Rerniblif-ans 3.1 14 

Proletarian Democrats 1. r> fi 

Liberals 1.3 5 

Kadicils 1.1 4 

Siultiroler Volkspartel . .'> 3 

OtlH^r.s .3 — 



:■■« (^lotofl hy Podblelskl, Glsele. "Italy: Development and Crisis The Post-War Economy," 
Oxford, the Clarendon Press. 1974. p. 15.3. 

'< "The F^uropa Year Book 1977: A World Survey," London. Europa Publications Ltd., 
1977, p. 866. 



69 

Prime Minister Andreotti was forced to form a minority ^ovcniiiioit 
because the parties of tlie left, whicli in tlie past liad joined with the 
Christian Democrats to form coalitions, followed (he Commuiiist lead 
and abstained. The strength of the Commnnists was so great af<er their 
electoral sliowing in the 1976 election that the Party could force the 
resignation of the Government at any time by voting with the opposi- 
tion. Given the composition of the smaller parties it was almost impos- 
sible to line up a majority for the Andreotti government if the (vom- 
munist Party voted against it. 

In December 1977, the Connnunists exercised this power. Together 
with the Socialists and the Republicans, the Communists withdrew 
their support and called for an emergency government of national 
unity to check the alarming growth of lawlessness aiul political ter- 
rorism and to I'educe the level of unemployment which had grown 
during 1977. 

The refusal of the Christian Democrats to admit the Communists 
into a coalition government resulted in a political impasse which led to 
Andreotti's resignation. If I'ecent precedents are followed, Italy may 
be governed for some time by a caretaker Andreotti government until 
a new government can be put together which can command a majority 
in Parliament. Some observers speculate that the Connnunists may 
agree to support the Government for something short of entry into the 
cabinet, such as the appointment of some Commimist experts to 
administrative posts and an increased PCI role in the formulation of 
legislative programs. This view takes account of the apparent PCI 
determination only to enter a government which commands a large 
majority. Such a prerequisite makes the Christian Democrats an essen- 
tial ingredient in any government with Communist members and thus 
suggests that the Christian Democrats are still in a strong bargaining 
position. 

In considering the stability of Italian governments, one must bear in 
mind the intractable character of the problems which any Italian 
government must face in present circumstances. Any government 
would be caught between the insistence of Italy's creditors that the 
Government follow a course of austerity and the determination of the 
Italian labor unions, the Socialists, and the Social Democrats not to 
alter such benefits as the escalator clauses linking wages to the cost of 
living index. Similar issues arise on all sides: how to limit public 
spending and at the same time supply badly needed public housing? 
How to collect more taxes to pay for more new programs given the 
inefficient system of tax collection? How to deal with the wave of 
violence wdiich is manifesting itself by the increasing number of shoot- 
ings and kidnapings? Such problems, difficult for any government, are 
doubly so for a minority government. 

e. The economic philosophies of key political parties 

The Christian Democrats, who won 38 percent of the vote in the par- 
liamentary election of June 1976, and the Communists, who won 34 
percent, are in the position to exert major influence on the formation 
of Italian economic policy. In addition, the economic philosophies of 
several smaller paities may play a significant role whenever their sup- 



20-866 — 7vS- 



70 

port is reqiiired to form a vit^.ble coalition or ])a?s a controversial piece 
of le<:^is]ation. 

The Clirht'ian Democrats {38.7 percent of 1970 vote for the 
Chamher of Deputies) 

The Christian Democratic Party, founded imdergromid in 1942, has 
been described as "an amorphous amalgam of Catholic-inspired group- 
ings." ^^ Its members run the gamut from leftwing intellectuals and 
younir technocrats to arch conservatives. Thus it is impossible to out- 
line a unified and coherent set of views which can be ascribed to the 
party as a whole. In the early fifties the party was firmly in the hands of 
Alcide de Gasperi. Both pragmatic anct visionary, he gave strong sup- 
port to business interests, was a leader of the European integration 
movement, and introduced a number of important social reforms, in- 
cluding a program for the development of the backward south of Italy. 
The left wing of the DC succeeded in moving the part}^ to the left in 
the early 1960-3, when it entered into coalition governments first with 
the Social Democrats and later with the Socialists. From 1963 to 1972 
Christian Democrat Prime Ministers formed coalition governments 
with the Socialists and Social Democrats, onl,y occasionally and for 
short periods omitting representatives of the left from the cabinet. 
From 1972 to 1976, cabinets were either centrist or center-left in 
composition. 

The economic views of the party are revealed in its legislative record. 
The DC has instituted programs for land reform and low-cost housing 
and passed tax reform legislation aimed at closing loopholes, rais- 
ing taxes on the wealthy, and preventing evasion; it expanded the 
public sector of the economy and speeded up the program for the 
modernization of the south, including the construction of an ultra- 
modern steel mill at Taranto ; it set up a system of economic planning 
along French lines and nationalized electric power. 

In the 1976 electoral campaign DC leaders stressed the need to cut 
public expenditures, reform the bureaucracy, and improve the social 
services. Their greatest problem was how to explain away the corrup- 
tion and incompetence in their management of economic affairs. 

In judging the fulfillment of the DCs electoral promises, it should be 
borne in mind that its leadership is subject to many pressures from 
powerful business interests, influential politicians in the right wing of 
the party, prominent members of the Catholic Church, and others. 
Some programs arc watered down in the process of legislation or im- 
plementation. Some are dropped, like an urban bill which was strongly 
opposed by the real estate interests. Professor Zariski has connnented : 

It is not surprising under the circumstances that when concrete reform meas- 
ures have been adopted, for example, land reform or the nationalization of elec- 
tric power, this has usually been made possible only by unrelenting pressure from 
the DCs actual or prospective allies.^ 

The Communists {3 I^,Ji. percent of 1976 vote) 
In outlining its views during the 1976 electoral campaign, the PCI 
presented itself as a resp()nsil)le and moderate reformist party.^^ It 
stated that : 



•'■ Kiiilc. John. "Ualy In tho I'JTO'h." Newloii Abbot. David Charles, 1975. p. Wl. 

■«Ziirlski, op. cit., p. 173. 

" LTnlta, Rome. Mav 16. 1976. as reported by FBIS, Supplement. May 28. pp. ni-G2, 



71 

The party held the opinion that it must not look to a further extension of the 
public sector of the economy hut should rearrange the si'ctor and give it "a 
renewed commitment" for the attainment of the main economic and social 
development objectives spelled out through democratic planning. 

Unlike its Frencli counterpart, the Italian CommunivSt Party has 
called for expanded worker participation in industrial management. 
In very f^eneral and noncoiiti'ovcrsial terms, its proirram touched on 
tax reform. Government administration reform, elimination of waste 
and corruption, ceilings on hi<>-her incomes, control of consumption, 
encouragement of reinvestment of profits in productive enterpriser, 
a ceiling on public debt, reduction of Italy's foreign deficit, preven- 
tion of tax evasion, and measures to make the oconomy more productive 
and competitive. It Avas a platform which fitted in generally with that 
of the Christian Democrats. 

However, it is difficult to estimate what the Communists w^ould do if 
they came into the Government. With a strong infusion of bourgeois 
and upperclass members and a long tradition of intellectual inde- 
pendence, the PCI has consistently advocated less totalitarian and 
more contemporary^ policies than the more doctrinaire French Com- 
munist Party. On the other hand, there are pressures and tensions 
within the party between the Berlinguer wing and more radical and 
doctrinaire elements. It is hard to know hoAv strongly and rapidly the 
Communists in the Govei'nment would press for a state-controlled and 
thoroughly egalitarian society and for shifts in Italian defense and 
foreign policies. 

The Socialists {0.0 pcTccnf of the 1076 vote) 

Tlie Socialist Party has been subject to many strains causing schisms 
throughout its history. Traditionally the party's economic philosophy 
is Marxist. But the party is divided between members who advocate an 
extreme, hard-line maximalist policy and those who prefer gradual 
tactics. The party is committed to national planning as the key to 
stnictural reforms. With the possible exception of the cement and 
phannaceutical industries, nationalizatioii is only to be emphasized 
when essential as a means of removing structurnl obstacles to the eco- 
nomic plan. However, the party would nationalize industries in which 
the state owns stock. It supports the European Community and the 
North Atlantic Alliance and accepts supranational planning which 
does not interfere with national planning.^^ 

Since 1968 the Socialists have frequently been members of coalition 
governments with the Christian Democrats. At present they are sup- 
porting the Government in Parliament. If in opposition to Government 
policy, they abstain rather than risk bringing the Government down 
by voting against it. The Socialists are strong backers of the trade 
unions. The}^ have not attempted to restrain labor leaders from seeking 
inflationary increases in wages. They press for measures to improA^e 
working and living conditions for the proletariat and to redistribute 
wealth. 



!»Zariskl. op. cit., p. 166. 



72 

The smaller parties 

The smaller Italian parties arc difficult to describe in the usual party 
terms as their members often view them as representing points of 
view rather than highly organized political entities. 

The Social Democrats won 3.4 percent of the vote in the 1976 
election. The Social Democrats support national planning but hold 
that it should not involve any loss of freedom of choice on the part of 
private businessmen. They advocate a socialism which keeps direct 
physical regulation of private enterprise to a minimum and relies 
primarily in fiscal tools to affect the movement of the economy. They 
have been unvrilling to work with the Connnunists. This was the reason 
for their withdrawal from the Socialist Party. Although no more 
united in vicAvs than other Italian parties, they have been one of the 
most consistent political groups in Italy in their support of the At- 
lantic Alliance and of close ties Avith the United States.^^ 

The Liberals, who won 1.3 percent of the 1976 vote, are in favor of 
a free market economy. They attack ('orru]:>tion and political intrigue 
and advocate government i-eform. 

The Republican Party won 3.1 percent of the 1976 A'ote. Its program 
is leftist, but non-Marxist, and anticlerical. In the socioeconomic field 
the party favors land reform, a strengthened cooperative movement, 
increased state regulation of economic life, economic planning, 
increased regional autonomy, and decentralization. 

The Radicnl Party won only four seats in the Chamber of Deputies, 
but as a protagonist for many controversial programs, such as di^'orce 
and abortion, it has exei-cised a certain influence in Italian politics. 

The Italian Social MoA-ement (MSI), Avhich won 6.1 percent of 
the 1976 A^ote, is a neofascist party. It faA^ors the establishment of a 
corpoi-ative state along functional lines based on the fascist economic 
model. The pai-ty has no significant parlinmentnvy influence because 
it is ostracized by all the parties to its left.^" 

B. France 

1. POSTWAR ECONOMIC DEA^ELOPMENT 

By the sixties France had made a sti-ong recovery from its long 
period of economic decline, which lasted from the Great Depression to 
the liberation of France (1929-44) . 

After the difficult years of the late forties, France's ]:)OstAA'ar recovery 
Avas relatiA^ely swift. Aided bv Marshall plan assistance amounting to 
$2.7 billion, France matched its prewar output peak by 1951 ; by 1957, 
its gross domestic product (GDP) stood at tAvice its 1938 leA^el. Be- 
tween 1949 and 1975, the annual groAvth rate of French ]-)roduction for 
all industry groups as a Avhole averaged over 5 percent.'*^ The French 
economic future, however, did not appear secure until the goA^ern- 
mental instability of the Fourth Kepublic and the severe political and 
economic strains of the French colonial wars were ended. 



•'» n)l(l., pp. 166-107. 
♦" Ibid., pp. 174-175. 

*i Carrp. .Toaii-.IacfincR. P. Dubois, and K. ^^alinvand, "Frt nch I'^cononiio Orowtli," Stan- 
ford, Calif. Stanford UniverBlty Press. 1975. p. 495. 



73 

a. Factors affecting French economic development 

Several factors, including some intano^ible ones, coiitrilmtofl to the 
rapidity and effectiveness of the French recovery after World War TI. 

During the period of the Vichy reo:imc and the German occupation 
many Frenclnnen who had been innnohilizod used tlicir enforced in- 
activity "to think seriously about the future and to explore new ideas 
and techniques * * *. Many of the older deadbeat <reneration came out 
of the war publicly discredited by their part in the Vichy Regime or 
the Occupation." ^- This made it possible for new men witli new ideas 
to move rapidly into positions of influence. 

Moreover, the French had a remarkable source of talent in engineer- 
ing, industrial design, and administi-ation. Gi-aduates of the Grandes 
Ecoles. the leading graduate schools in these disciplines, formed an 
elite corps of brilliant and highly educated men who found it easy to 
work together. They provided many of the leaders of the French 
economic recovery. 

h. French planning 

Wartime destruction in France was more widely distributed geo- 
graphically in the second war than the first and required reconstruc- 
tion on a more comprehensive scale. As early as 1945 Jean Monnet, 
with the blessing of General de Gaulle, established a planning office 
(Commissarw.t du Plan) to work up a master plan for reconstruction. 
The first French plan gave precedence to the reconstruction of basic 
industries, such as steel, coal, and electricity so that they would pro- 
vide the basis for a lasting recovery. 

The planning process has been continued on a 4- or 5-year basis. 
French plans are indicative, not mandatory. They provide detailed 
forecasts and goals setting forth the relevant facts and interrelation- 
ships; but the targets have no binding force even on nationalized in- 
dustries. Thus one French economist, Jean-Jacques Carre, has 
commented "* * * in an economy such as the French, where the market 
plays an important role, it seems reasonable to assume that heads of 
firms did not in general make decisions contrary to the indications of 
the market and to the good management of their firm in order to ensure 
consistency with the indications provided bv the National Plan." ^^ 

Carre went on to say that in general the "forecasts have contributed 
to the creation of an expansionary climate. The picture of a growing 
economy provided by the plan, in Avhich production would be sure of 
finding sales, probably played a significant part in the resumption of 
growth. In particular, the launching of large investment programs in 
the heavy sectors of the economy, such as iron and steel in the early 
1950's, was linked to the influence of national planning. Similarly, the 
preparation of the Fourth National Plan seems to have played a sig- 
nificant part in the 1960 expansion at a time when firms were still 
strongly affected by the difficulties of 1958-59." ^^ 

c. French governmental infMence in the economy 

Following a tradition that predates the French Revolution, the state 
plays a larger role in the direction of French economic life than is the 

« Ardagh, John, "The New French Revolution," New York and Evanston, Harper & 
Row. 1969, p. 14. 

« Carr6, op. cit, p. 461. 
"Ibid., pp. 425, 471. 



74 

case in Germany and Britain. A number of industries are controlled 
directly by the Government. In 1936 the left wing: Popular Front na- 
tionalized armaments, the railroads, and (partially) tlie Bank of 
France. In 1944-46 broadly based governments, led by General de 
Gaulle, took over the Renault car factory, civil aviation, the merchant 
marine, the coal mines, electricity and gas, some insurance firms, the 
Bank of France in full, and the larger clearing banks. Writing in 1969, 
John Ardagh estimated that "about half of all investment is controlled 
by the state." *^ Thus the influence of state policy on economic develop- 
ments is strong. 

d. The French educational sy stein 

A contributing factor to the growth potential in the French economy 
is the fact that from the end of the 19th centur}' the French educational 
system has steadily extended the length of education of the average 
student. In 1965, 87 percent of the young French were enjo^dng pri- 
mary and secondary education as against 76 percent of young Germans 
and 72 percent of young Britons.*^ The percentage of French citizens 
who remain in school up to or beyond 15 is continuing to rise. A grow- 
ing percentage of the working population is being equipped to handle 
more complicated work assignments and thus to achieve a higher 
degree of productivity. 

e. The French hhthrate 

One of the striking differences between prewar and postwar France 
was the increase in the birthrate, which before 1940 Avas the lowest in 
Europe. Since 1960 the French birthrate has become the highest in 
Europe. By 1968 about 50 percent of the French population was under 
?>0 years of age.''" (Section III-D-2 of tliis study examines French 
population and work force statistics more closely.) 

/. French inditstrial development 

In the early 1050's French labor unions had exerted pressure to dis- 
courage the immigration of overseas labor. As a i-esult, the French 
labor market I'omained rather tight. During this })eriod. the answer 
to increasing French output was to be found not in 'm\ expanding 
labor force but in French industrial efliciency. Prof. Charles P. Kindle- 
berger has pointed to the emphasis in French national planning "on 
improved technology and larger productive units" as the "cause of 
great French efficiency during the fifties." He wrote: 

French technical drive has brilliantly emerged in the postwar period in nation- 
alized industries, especially in Electricite de France. Renault, the railroads and 
aircraft companies, and in many private industries. Far more than most of 
Europi' and somewliat more than Italy, French economic recovery has had not 
only a broad content of technolojry catching up with the leaders but also a strong 
(»lement of independent invention.*^ 

(/. Worh hrih/ts of Frnich labor 

Tlie French manufacturing labor force has consistently lost fewer 
days in strikes than Ihe Brit ish Jind the Tl nlians and put in longer work 
weeks. 



**Ar(laxh. oi). clt.. p. IS. ' . _ • ,. . ^^„. 

<" Tltulson Tnstltnti'. 'M-rnnco ;iii<l TN Fntnro." Proloii on-TIiKlson. New \ orlc. 1074, pp. 



ID ."SO, .'■)4. 

<■' Ihld., pp. 40-50. 
'" I\lii<lIob»>rpf'r. op. rll.. ji 



75 

A. Labor ninnUjint'ioii and. '/uleriKil iiiN/iolfon of labor 

In the latter 1950's the manpower refniireinenls of Uie Frencii 
colonial wars revealed the need lor immigrant labor {iiid restrictions 
against immigration were lifted. From 19G2 to 11)74, net immigratioji 
averaged 130,000 ji year. By 1970, there were roughly 2 million foreign 
workers employed in France, for the most jjurt in menial work which 
the French were unwilling to do themselves. ]Mean while, a major in- 
ternal migration of French workers took place. Between 1900 and 
1970 approximately 1.3 million left agricultural employment seeking 
new jobs in industry. The French Government piovided training 
courses but was not able to keep up with the demand.'*^ '' 

i. French political and econaniic events 

The gains of the French economy in the fifties waiv all the more 
impressive because of the shifting character of political leadership. 
The coalition governments of the Fourth Hepublic in the fifties weiv 
weak and transitory. Annual budgets were often in deficit, partly 
owing to costly colonial wars in Indochina and Algeria. Stabilization 
policies to control inflation sometimes brought the economy to a stand- 
still. By the late fifties the franc was one of the Aveakest currencies in 
Europe. The rise of French prices and the lack of an effective wage 
policy were damaging French exporters' chances abroad. In two re- 
spects, however, Fourth Republic governments followed sound policy. 
They gave their support to the French National Development Plans. 
And, overruling the doubts or open opposition of most of private 
industry, they brought France into the Common Market. •'^'^ 

;/. The Fifth Republic 

When De Gaulle came to power in 1958, he acted quickly to stabilize 
a precarious economic situation. On Decembei' 27, 1958, the franc was 
devalued by 17.5 percent, giving a boost to French exports and restor- 
ing the trade balance. Foreig-n exchange reserves climbed and large 
sums of capital returned to France. Real GNP growth picked up and 
averaged 5.8 percent annually for 1960-70, the second highest rate in 
Western Europe. ^^ 

The creation of a strong government and the shrewd handling of 
the Algerian problem set off a burst of optimism and self-confidence 
that was reflected in a high rate of investment and th(» ambitious pro- 
grams projected in the Fourth National Plan. By this time French 
industrialists were beginning to show more initiative in modernizing 
production and management methods. As Carre put it, "in this way 
was born a mixed economic system, in which markets play a great role, 
and competition is maintained or reestablished among national pro- 
ducers at home and overseas, while the government takes on certain 
direct responsibilities in economic management." ^^ 

Growth during the first decade of Gaullist rule was not only rapid 
but surprisingly stable and noninflationary. Price increases did accel- 
erate markedly in 19G2 but were quickly checked by a stabilization 
plan drafted by the then-Finance Minister Yalery Giscard d'Estaing. 

49 Hudson Institute, op. cit., p. 63. 

^"Ardaeh, op. clt., p. In. 

"Hudson Institute, op. cit, p. 32. The comparable figure for Italy was 5.9 percent. 

^= Carr«, op. cit, p. 504. 



76 

Growth was only briefly affected. Occasional labor disturbances, such 
as large-scale strikes of miners and other public employees in March 
1963, were settled without major disruption of the economy. Major 
disturbances did not recur until the end of the decade. 

k. May-June 1968 and thereafter 

Widespread strikes in May-June 1968 brought the French economy 
almost to a standstill and caused production losses amounting to about 
3 percent of GXP. Peace was restored by granting large wage 
increases. The wage gains in turn led to an acceleration in inflation, 
a sharp rise in imports, and a growing trade deficit in 1968. The cur- 
rent account incurred a deficit of $1,220 million as against a surplus 
of $250 million in the previous year. Government efforts to support 
the franc against speculative capital flows led to losses of reserves 
amounting to $2.8 billion in 1968. On November 25, 1968, the Govern- 
ment reintroduced exchange controls. 

In the face of continuing trade deficits and speculative pressure, the 
franc was devalued 11.1 percent, and a number of steps were taken 
to decrease domestic demand and to monitor price increases. French ex- 
ports became more competitive as a result and trade equilibrium was 
restored. Despite a strong rise in impoi'ts the French trade balance 
was in surplus b}^ $726 million in 1970. 

Thus, throughout the sixties and the early seventies French eco- 
nomic policy remained fairly flexible, responding swiftly to cyclical 
swings without any need for largo-scale adjustments by the authorities. 
Economic problems were generally handled expertly by a well trained 
and efficient bureaucracy capable of enforcing its decisions. And the 
public sector was run by capable men. But after the 1968 upheavals 
inflation never returned to the relatively slow pace of the midsixties. 

I. Shortcomings in the French economy 

Despite the remarkable progress which had been made during the 
1960*s, there were numerous shortcomings in the French economic sys- 
tem. France lacked a satisfactory capital market. Industry had to 
depend too much on state loans because self -financing capacity 
was inadequate. Several attempts have been made to ex])and the Paris 
"Bourse" but progress is slow. The need for investment capital pro- 
vided an opening to American capital which considered P^ ranee an 
excellent prospect with its access to the Common Market. 

A more disconcerting problem is that France's extraoi'dinary ma- 
terial gains have apparently not been fully translated into greater sat- 
isfaction with the quality of life. Labor is demanding not only higher 
wages but also better working conditions, longer holidays, and better 
training. Demands for an iuiprovement in the quality of life ])layed a 
leading part in the extraordinary spontaneous uprising of May-June 
1968. And the growing strength of the Socialist and Comnumist 
Parties appears to be an expression of the desire for a richer 
and more egalitarian existence among workers, students, and 
many intellectuals.^'-^ 

"Ardagh, op. cit., pp. 92-95. 



77 

vi. The mid seventies 

By the midseventios, the economic environment lifid jjecome more 
difficult. The 1973 jump in oil prices and the world dej)ression of 11)71 - 
76 presented the French economy with an intensification of inflation- 
ary pressures, balance of payments deficits, and hi<j^h nnemi)loym('n(. 

Under these pressures the French Government on January lli, ]I)7L 
withdrew the franc from the P^uropean "snake" (the monetary system 
which obligated its members to keep tlie deviation of their currenci(>s 
within narrow limits) and allowed it to float. Thereafter, the franc 
be^an to depreciate, though not si^ificantly. 

Faced with the obvious risk of a spiral of mounting inflation, a wors- 
ening foreign balance, and a falling exchange rate, the French Gov- 
ernment introduced an austerity stabilization program in September 
1976. The program put a 3-month freeze on prices and aimed at limit- 
ing w^age increases during 1977 to the rate of price rises ; it also took 
some steps to encourage investment to move into more productive en- 
terprises. The program did nothing to put more than 1 million unem- 
ployed back to work — a serious political problem before the national 
parliamentary elections scheduled for March 1978. 

On April 25, 1977, Prime Minister Barre announced some additional 
measures aimed at cutting unemployment, relying chiefly on "tax 
reductions and other incentives to encourage companies to create more 
jobs, particularly for the young." ^"^ 

Prime Minister Barre succeeded in getting his program passed in 
the Xational Assembly thanks to the support of the GauUists, who 
reluctantly followed the urgings of former Gaullist Prime Minister 
Jacques Chirac to suport the Government on this issue. The program, 
however, was protested by the largest demonstrations in Paris since 
the mass demonstrations of May-June 1968. 

The "OECD Economic Outlook" for July 1977 anticipated that the 
French GDP annual growth rate will not exceed 3 percent in the first 
half of 1978. Thus any major improvement in the unemployment situ- 
ation is unlikely ; it could be in the nature of 5.5 percent of the work 
force when the March 1978 elections take place. Wage increases have 
declined slightly and "could be around 12.5 percent for 1977 as com- 
pared to 15 percent for the previous year." Although the French trade 
balance remains in deficit, current projections place the 1977 deficit 
close to $4.5 billion as against $6,067 billion in 1976.^^ 

On August 30, 1977, the French Government announced a new pro- 
gram to revive the country's economy. It contained a lending and 
spending program valued at about $1.1 billion. The program included 
increased allowances to families with school-age children and more 
loans for business investment and housing. The central bank lending 
rate w^as cut from lOi/^ percent to 9I/2 percent. The plan will result in a 
government deficit, which previously President Giscard has eschewed. 
Commentators interpret this change of policy as a move to improve the 
Government parties' electoral chances in 1978.^^ 

5* The New York Times, Apr. 27, 1977. 

» OECD Economic Outlook, July 1977, op. cit, pp. 115-116. 

B« The Wall Street Journal, Sept. 1, 1977. 



20-866—78- 



78 



2. SELECTED IXSTITUTIOXAL FACTORS 



a. The manaqerial class 

The traditional forms of business enterprise in France are either the 
famil}^ business or the state enterprise. In the former case, the family 
company may be large, as in the case of Peugeot, Michelin, and a num- 
ber of the big textile factories, or it may be small, as in the case of 
hundreds of small specialty trades such as the cutlery factories in 
Thiers. Eenault and Air France, which were nationalized at the end 
of the war, provide examples of state management of large enterprises. 

In general the number and influence of family firms is declining. 
Stiffer competition, particularly since the development of the Euro- 
pean Community, has forced companies to increase their efficiency by 
bringing into managerial positions new salaried managers and execu- 
tives. The ne^d for expansion and modernization has often required 
raising money by selling shares on the stock market instead of relying 
on the profits of the company, thereby diluting the share of the family 
in the ownership of the firm. Thus, the role of the technocrat is be- 
coming greater in French industry. 

Technocrat managers, who are becoming more common both in gov- 
ernment and in private industry, often come from the higher social 
classes and have received the best French education. One observer has 
commented that these top executives frequently have brilliant brains 
but lack practical experience. "They hai^e tended to seclude them- 
selves further from the practical facets of industry — and thus from a 
challenge to their position — ^b}^ keeping a comfortable distance between 
the top echelon of management and the lower levels." ^^ More recent- 
ly, as technical education is more widely disseminated, the technocrat 
manager may come from a lesser social position. 

French management has been highly centralized. The fresident- 
directeur general usually monopolized top managerial functions. He 
carried on the basic planning, viewing his top management "as good 
enough to administer his decisions but as quite incompetent to take 
part in basic planning." ^* However, French management is becoming 
somewhat less of a one-man operation. A degree of delegation of au- 
thority is being recognized. In French industry there are two routes 
to the top. The first is that of moving from a top rung of the civil 
service into a highly paid job in private enterprise; the second is mov- 
ing through the company hierarchy. In the early 1960's the attention 
of top management was centered on production and physical expan- 
sion, so that promotion to the top was likely to come to a man who 
excelled in this side of the business. But recently more emphasis has 
been placed on business management and sales promotion. 

Business schools have been established in France and many French 
managerial technocrats have spent a year or two in the United States. 
Unlike some German and British business trainees who come to the 
United Staters and remain, the Frenchmen seldom fail to return to 
France. Moreover, they have tended to maintain their French individ- 
ualism in dealing with problems of organization, publicity, and sales 
promotion. They have generally rejected such American methods as 

^"Van dpr Haas, Hans, "The Enterprise In Transition," London, Tavistock Publications, 
•• Granlck, David, "The European Executive," New York, Doubleday & Co., 1962, p. 2o9. 



79 

orp^anization charts, or interview toclinifiues. They do not lake to work- 
ing through committees — preferring to let individuals lumdlc tlicir 
own problems on an individual basis.*^^ 

The principal organization representing large French business is the 
Conseil National du Patronat Frangais (generally known as the Pn- 
tronat). John Ardagh describes it as "an incarnation of the stolider 
aspects of traditional French management * * *. Notably it upholds 
the authoritarian tradition of French industry and stresses unity of 
command.-' *^° While the Patronat does oppose a labor role in juanage- 
ment, it is far from out-of-touch with current ecoiiomic problems. It 
has a competent research staff and its pronouncements on economic 
issues usually reflect sound analysis more than polemics. 

Changes are occurring among the thousands of small and middle- 
sized employers, many of whom are finding it difficult to adjust to 
changes which are revolutionizing much of French life. Since 1958, the 
beginning of the Common Market, which exposed France to competi- 
tion on a scale previously unknown, the leading organization of small 
and middle-sized businessmen, the Confederation Generate des Petites 
et Moyennes Entreprises (PME) has become active in persuading its 
million members to modernize and group together. 

h.The trade unions 

The trade union movement in France is weaker than in the United 
Kingdom and Italy. Figures on union strength are usually considered 
inflated but an educated guess is about 4 million out of a total labor 
force of 21 million.^^ However, membership fluctuates greatly. In 
the late 194:0's, the labor movement claimed a membership of about 
6 million. Membership is thought to have gone up by about 20 percent 
directly after the May-June 1968 uprising.^^ 

The power of the French trade union movement has been reduced 
by its factionalism. The movement is deeply split along ideological 
and political lines. What began as a unified movement has ended up 
as three hostile organizations. 

The largest French organization is the Communist-controlled Con- 
federation Generale du Travail (CGT). It was founded in 1895 but 
split in 1920 into Socialist and Communist confederations. After 
World War II the CGT again became the umbrella organization for 
the entire French labor movement. In 1946 a Communist-dominated 
CGT congress changed the CGT statutes to create a method of voting 
by which the seven largest unions, all controlled by Communists, 
would in the future be assured of a perpetual majority. Since that time 
the French Communist Party (PCF) has controlled the CGT. Its cur- 
rent president, Secretarv General Georges Seguv, is a member of the 
PCF Political Bureau.^3^ 

Reacting to the Communist takeover of Czechoslovakia, many CGT 
members seceded in 1947. With the help of the AFL-CIO, Socialist 
dissenters founded the Confederation Generale du Travail — Fm^ce 
Ouvriere (CGT-FO). In the same year a Catholic-oriented group of 

6» Ardagh, op. cit, p. 32. 
«oibid., p. 33. 
81 Ardagh, op. clt., p. 34. 
8-^ Ibid., p. 467. 

8' Tiersky, Ronald, "French Communism 1920-1972." New York, Columbia Universitj 
Press, 1974, p. 132. 



80 

dissenters established the Confederation Framaise des Travailleurs 
Chretiens (CFTC). The CFTC split in 1964 with the larger portion 
assuming a nonclerical character and a new name, Confederation 
Frangaise Democratique du Travail (CFDT). 

Recent estimates of the relative strength of the three rival associa- 
tions give the CGT about 2,400,000 members, the CFDT over 1 million 
members, and the CGT-FO between 400,000 and 500,000. 

The three labor confederations have not formed the kind of working- 
relationships which the Italian labor associations are currently achiev- 
ing. The CGT-FO has "remained frozen in the traditional attitudes'' 
of the Socialist ideas of the thirties, including the support of tlie prin- 
ciple of nationalization.^* The CFDT has been more open to new ideas 
and has attracted many radical new members. Dissension and loss of 
discipline have resulted in a weakening of the movement, at least 
temporarily. The CGT continues to follow the PCF line but also works 
pragmatically for the remedying of specific workers' grievances. 

Another source of weakness of French unions, with the exception 
of the CGT, is the lack of close links between French trade unions and 
political parties. Furthermore, their financial resources are limited. 
Without substantial strike funds they cannot support a strike for 
more than a few days except in very unusual circumstances. The 
strikes of 1968 were not begun at the initiative of the unions. Tliey 
were the consequence of a spontaneous uprising set off by French 
students. Throughout the demonstrations, the CGT, in line with Com- 
munist Party directives, played a moderating role attempting to main- 
tain discipline and restore order. 

A major function of French unions is the negotiating of wage agree- 
ments with industry at the appropriate level. This can be done on a 
national, regional, or plant level. But in general, French trade unions 
have not played a roll comparable to that of the British and Italian 
unions. A sign of their weakness as compared to British unions is 
the fact that even in 1968 French unions were still campaigning for 
recognition by employers of the right of union officials to carry on 
union business on the firm's time.^'^ 

c. The civil service ^^ 

France is administered by a centralized, unitary national civil serv- 
ice. A key characteristic of France's public administration is the gi'eat 
power of the administrative elite which forms the so-called grand 
corps. This prestigious group has a pervasive influence because its 
members rise to top management posts. 

The organizational lines of French administration carry over from 
the Napoleonic era and the civil service continues to follow an inter- 
ventionist philosophy of government inherited from earlier days. A 
sense of permanence and continuity contributes to the self-confidence 
felt by the public administrators, who have benefited from the fact that 
durin<T: the rapidly changing coalition cfovernments of the Third and 
Fourtli French Republics, most Frenchmen believed it was the civil 
service which kept the French state mnning. 

H,^Z'J'''''^'''^• I^fToUiv. "Tho r.ovoniniont mid Tolitics of Franco." London. ]\rotluion i<l- Co 
1072, vol. ], pp. 273-274. 

« PJrkle.s. op. eJt., p. 271. 

<« Tills spftlon is l.nsod on tlio PK.q study "TTisfory of Civil Sorvice Merit Systems of the 
Lultod States and Selected Forel<?n Countries," op. clt., pp. 351-390. 



81 

Formal education is the initial determinant of upper level career 
advancement. The state has created a orraduate educational system to 
train its civil servants. Tlie two most presti^^nous schools arc the Kcole 
Poly technique and the Ecole Natio-nale d^ Admijiistration (EXA). 
Graduates in political science, economics, and law enter a 3-year EN'A 
course to begin their civil service careers, while technocrats <iro to 
Polytechnlque for further training in engineering and other technical 
fields. 

This system is elitist to the core. It was designed to build a bureauc- 
racy whose members are chosen on the basis of rigorous educational and 
intellectual standards. Officials destined for high office are selected 
early in their careers for rapid advancement. Moreover, they arc often 
shifted from one ministi-y to another as they pursue their career 
course. This has tended to develop throughout the bureaucracy 
an unusually high degree of community of outlook, professionalism, 
and esprit de corps, all characteristics wdiich have contributed to the 
French propensity for centralized government planning. The higher 
civil service, however, does embrace various political views. For ex- 
ample, it contains many members of the Socialist Party. 

The French civil service has not adopted the American practice of 
filling civil service positions on the basis of open competition in which 
outsiders can enter government service at any level if better qualifiod 
for the job in question than civil service competitors. Thus the French 
method has discouraged interchange between the bureaucracy and the 
private sector along American lines. However, the movement of French 
civil servants to highly paid private sector positions after they have 
reached the top rung of their public administration ladder has ex- 
panded the conmiunity of interest between the civil service and the pri- 
vate sector, especially in the largest private firms. 

While most recognize the abilities and talent of the civil sei'vants. 
some quarters of French society increasingly express concern that the 
bureaucracy is too much involved in managing French life without 
grasping its problems and aspirations. They see it as a representative 
of the status quo in a stratified society. To these critics, France is 
increasingly governed by a class of insensitive, technocratic citizens 
who are far removed from the general population. 

d. GoverriTnental stahility 

The approach of the French parliamentary elections, scheduled for 
March 1978, brings the political implications of the French economic 
situation into increasingly sharp focus. Continued inflation and high 
unemployment raise serious problems for a government in power. And 
a victory by the French left could raise difficult constitutional 
questions. 

The constitution of the French Fifth Republic, drafted to meet the 
conceptions of General de Gaulle, worked well when he was President 
and could count on a strong Gaullist majority in the French National 
Assembly. But in the Presidential election of 1974 Yalery Gisrard 
d'Estaing won by a majoritv of only 400.000 out of 26 million ballots. 
As leader of the small Republican Party he can only count on 55 depu- 
ties. For a majority in the National Assembly of 490 members, he has 
to depend on some other centrists and 183 Gaullists. 

When Giscard's Gaullist Prime Minister Jacques Chirac resigned in 
protest over Giscard's tactics for campaigning against the parties of 



82 

the left, the President named as Prime Minister Raymond Barre, a 
professional economic expert. As a result of this development, Giscard 
is having greater difficulty in getting his measures through the Na- 
tional Assembly. Chirac, who is leader of the Gaullist Party, is clearly 
attempting to displace Giscard as the leader of a center-right coalition. 
Although Chirac directed his followers to support the Government 
in the parliamentary debate on economic policy last spring, it is not 
certain that he will continue to support Giscard in the future. Thus a 
conflict between the National Assembly and the President might occur 
even before the parliamentary elections. 

The 1978 election may create even greater constitutional difficulties. 
If the Union of the Left wins control of a majority in the National As- 
sembly, President Giscard will have no choice but to appoint Socialist 
leader Frangois Mitterrand as Prime Minister. Any other selection 
would result in an immediate political stalemate. 

The French constitution does not contemplate a situation in which 
the President and the Prime Minister belong to opposing parties. It 
gives no indication of how an irreconcilable difference between the two 
can be resolved. Only in the case of extreme crisis does the constitu- 
tion give the President the right to exercise emergency powers. Article 
16 reads as follows : 

When there exists a serious and immediate threat to the institutions of the 
Hepublic, the independence of the Nation, the integrity of its territory, or the ful- 
fillment of its international obligations and the regular functioning of the consti- 
tutional public authorities, the President of the Republic takes the measures 
required by the circumstances after consulting officially with the Prime Minister, 
the Presidents of the Assemblies, and the Constitutional Council."' 

It would be extremely difficult in practical terms for President Gis- 
card to invoke these emergency powers unless there was a genuine 
crisis of the scale contemplated by the words of the constitution. In 
short, if a deadlock between the President and the Prime Minister oc- 
curs, the country will be faced with a constitutional dilemma for which 
there is no precedent. Such a situation might lead to either new parlia- 
mentary or presidential elections. 

It is possible, however, that Giscard may find it possible to get along 
with a government of the left. Thus France may be governed at least 
until the Presidential election of 1981, by a centrist President, a Social- 
ist Prime Minister, and a left-dominated parliament. 

At the present time the outcome of the parliamentary election is 
liard to predict. Up until late summer 1977, the prospects of the Union 
of the Left (Socialists, Communists and Left Radicals) looked good. In 
recent local and regional elections and by-elections the union had won 
between 52 and 54 percent of the vote. Although it does not necessarily 
follow that French voters would give the same suppoi-t to the left in a 
national election that they did in local elections, this recent increase in 
electoral strength in local elections is impressive. Moreover, French 
public opinion polls were projecting percentages as high as 56 percent 
for the Union. Then in late summer serious disputes broke out between 
Socialists and Communists over the renegotiation of their common pro- 
gram, whi(;h had been agreed upon in 1972 and expired in the summer 
of 1977. Among numerous disputed points the extent of nationalization 



•'Pickles, op. cit., vol. 1, pp. 303-304. 



83 

was prominent, the Socialists bein^ pled<i:cMl to limitccl nal ionalization 
and the Commimipts calling for oxtonsive nationalizjilion. Some ob- 
servers believe that the Coniinunists deliberately insisted on positions 
which the Socialists could not accept in order to break up the Union 
and then blame Socialist intransio^ence for its demise. They arfrue that 
the Communist leadership has recently concluded that a S(K'ialist vic- 
tory would make the party so stron<^ that its position as leader of the 
left would l)e unassailable. The Communists would then find them- 
selves with little power and with their claim to be the van<ruard of the 
workinc^ class discredited. In order to weaken the Socialists, so the 
artrument runs, the Communists are willing to pay the price of elector- 
al defeat. 

Ne^Qfotiations continue within the Union of the Left and until they are 
concluded or terminated it is premature to attempt to predict the elec- 
toral outcome. But there are signs in public opinion polls of an adverse 
eifect of these developments upon the standing of the Union of 
the Left with the French public. In early October polls showed a de- 
cline of 4: percentage points in their estimates of support for the Union 
of the Left from a high point of 56 percent earlier in the year to 52 
percent. 

e. The economic philosophies of French political parties 

The most important political parties likely to influence significantly 
the policies of the French Government in the near future are the Re- 
publicans, the Gaullists, the Socialists, and the Communists. 

The Republicans 

The influence of the Republican Party is far larger than its size 
suggests because it is the party of President Giscard d'Estaing. It 
has only 55 seats in the National Assembly out of a total of 490. 

President Giscard d'Estaing has expressed the economic philosophy 
of the party in a book published in 1976 entitled Bemocratie Fran- 
cahe.^^ The book contains an eloquent presentation of the case for 
economic pluralism. Wliile recognizing that the role of the French 
state is large and pervasive (financing 40 percent of national produc- 
tion) and conceding the value of indicative national planning if dem- 
ocratically organized, the book considers the essential element in a 
flourishing economic system to be the mechanism of competition in 
the marketplace. This leaves individual initiative and private enter- 
prise free to take direct charge of the basic decisions.^^ 

The party treats full employment as one of its first policy objec- 
tives. But it gives the fight against inflation a high priority in the 
belief that a solvent economy is the precondition for other social and 
economic improvements. Thus Giscard d'Estaing and his Prime Min- 
ister Raymond Barre maintained an austerity program up to August 
30, 1977, when steps were taken to reflate the economy, presumably be- 
cause of the approaching parliamentary elections. 

Giscard has been a reformer. He has introduced legislation reduc- 
ing the standard workweek from 54 to 50 hours, lowering the retire- 
ment age to 60, facilitating contraception, and improving prison con- 
ditions. He favors measures to improve labor relations in factories but 

«^ Giscard d'Estaing, Val€ry, "D^mocratie Frangalse," Paris, Librairie Arth&me Fayard, 
1976. 

«»Ibld., p. 118. 



84 

is opposed to "autogestion'' (labor self -management of factories). He 
has also been more European in his outlook than the Gaullists and 
has played an active role in the European Community. In general, 
he aims at appealing to voters who now seem to be in favor of the 
Union of the Left. 

Rassemblement pour la Repuhlique ( Gaullists) 
The Gaullists have 183 seats in the National Assembly. 
In the past, Gaullist policy has been strongly nationalistic in eco- 
nomic as well as political terms. Under the leadership of President 
de Gaulle especially, the party played an important part in the mod- 
ernization of the French economy. It helped finance some of the most 
progressive large-scale factories, such as the Dassault aircraft and 
Renault automobile plants. It pushed for expensive prestige programs 
like the French nuclear program, the English Channel tunnel, and 
the Concorde aircraft. The Gaullists have followed a fiscal policy 
which stresses the importance of gold in international finance. They 
opposed the creation of SDK's by the IMF. They have tried to limit 
the expansion of the economic power of the European Community. 
They have also opposed any increases in the influence of multinational 
corporations in France. French business interests have been strong 
in the Gaullist Party, especially during the presidency of George 
Pompidou. President de Gaulle personally advocated some measures 
which were not popular with the majority of French businessmen. He 
was in favor of profit-sharing in industr}' and called for participation 
of labor in management in 1968. 

Gaullist Party leader Jacques Chirac wishes to make full employ- 
ment a major objective in his electoral policy. In any campaign to 
win over the working class supporters of the Union of the Left, full 
employment is an important slogan. Chirac may therefore press for 
a greater degree of reflation to stimulate the economy than contained 
in the government's Augiist 30, 1977, program. "^^ 

The Union of the Left 

The electoral alliance of the Socialist, Communist, and Left Radical 
Parties ^^ which form the Union of the Left defined its agreed 
policy goals in June 1972 and published a common program. The 
agreement was to last until the summer of 1977, and the parties are 
now engaged in revising it for the 1978 elections. The negotiations 
between the three parties have been so bitter and divisive, particularly 
over the issue of how extensive nationalization sliould be, as to arouse 
speculations whether the Union of the Left will survive in its present 
form. What shape, if any, a new agreement will finally take is not yet 
clear. But a summary of the earlier agreement Avill serve to illustrate 
the main thrust of the ITnion of the Left's economic i^olicy. 

The economic goals of the common program included the national- 
ization of {ho ])ankiug and financial sectors of tlie economy, including 
insurance, as well as the armaments, nuclear, pharmaceutical, aeronau- 
tical, and space industries, and industries concerned with natural 
resources. (Nine companies were identified by name including ITT- 

'" Ardnjjh, op. rlt., p. 405. 

" Tho SorlaliRtR and Loft Radicals had 102 seats in the National Asspmbly as of June 
1977. The Communists have 73. 



85 

France and IToneywell-Bull.) The pro<]^rain callod for government 
control of the electronic and chemical industries, oil, steel, air and sea 
transport, water treatment and distribution, telecommunications, and 
motorway concessions. It planned to reor<Tanize tlie ener<^, trans[)()r- 
tation, and armaments industry, and to develop sectors me(>tinfj; social 
needs, such as construction, pharmaceuticals, leisure, culture, and tour- 
ism. It also called for control over forei<rn inv(»stments, stron<^er ex- 
change control laws, actions against speculators, and other measures 
"to defend the franc." 

Its social goals included a guaranteed minimum monthly wage of 
1,000 francs ($402 at current exchange rates) geared to the price in- 
dex, increased pensions, a lowered retirement age, a 40-hour week, 
improved working conditions, reductions of unemployment, reform 

of labor legislation, revision of the hospital system, and educational 
re forms. ^2 

The Socialist Party (PS) has stated that it continues to support a 
free market sector in the French economy and that nationalizations 
will be limited to those companies which have been specifically desig- 
nated by name in the common program. '^^ Socialist Party leader 
Frangois Mitterrand has also emphasized that he favors economic 
self -management, democracy in business organization, and workers' 
control of factories (autogestion) rather than the "bureaucratic sys- 
tems that characterize Communist society as we know it." 

Thus, the Communists and Socialists continue to be divided over a 
number of basic issues, including the degree of nationalization and the 
means of compensating owners. 

C. United Kingdom 

1. POSTWAR ECONOMIC DEVELOPMENT 

In the early postwar period the United Kingdom had the highest 
per capita income in Europe except for Sweden and Switzerland. But 
from 1949 to 1963, the British average annual real growth rate of 2.1 
percent was less than half that of Germany, France, or Italy. By the 
early 1960's, the United Kingdom found itself overtaken by other 
countries in per capita income. By the mid-1970's, its slow rate of 
economic expansion had given it one of the lowest per capita gross 
national products among the advanced industrial nations. 

As a mature economy, that of the oldest industrial country in the 
world, the British economy did not grow at the same pace as Italy, 
which was just taking off as an industrial country, or Germany, which 
was building up a new economic structure out of the rubble of defeat. 
Britain also failed to keep up with its historic rival, France. 



■^3 ''Report on West European Communist Parties." submitted by Senator Edward W. 
r.rooke to the Committee on Appropriations, U.S. Senate. Washington. U.S. Government 
Printing Office, June 1977, pp. 92-95. 

^» The difference between the Communist and Socialist positions regarding: nationaliza- 
tion is expressed in the different formulas used to calculate what firms would be involved. 
The Communists call for the nationalization of all affiliates of the nine company groups 
listed in the 19T2 common program which are owned by more than 50 percent by the 
parent company. The Socialists would nationalize only those affiliates which are 98 or 100 
percent so owned. At first, the Communists called for nationalizing 1,500 enterprises, later 
reduced the figure to 729. The Socialists began with a figure of 100 and raised It to 200. 
L'Express, No. 1386, Oct. 2, 1977, pp. 33-35. 



86 

a. The effects of the war 

"Because of World War IT, the United Kinsjdom had been forced to 
liquidate a substantial part of its foreign investments. In 1938, net 
income from overseas investments paid for 26.9 percent of all British 
imports. In 1900, it paid for only 5.8 percent.^^ 

Although wartime bombing was considerable, much of Britain's 
industrial plant survived. This proved to be a mixed blessing. British 
industrialists found it difficult to keep up with the modern factories 
on tlio Continent. With i-are exceptions, they did not invest in n^oderni- 
zation on a scale large enough to make their factories competitive. 

As a victorious rather than a defeated country, the United Kingdom 
did not experience the thorough shaking uj) of traditions which helped 
to spark much of the ]:)ostwar innovation and drive on the Continent. 
In the United Kingdom many old ways remained. For example, the 
British system of higher education still concentr;Ued on the prepara- 
tion of its graduates to be ])ublic officials, ^lembers of Parliament, 
lawyers, bankers, scholars, and scientists. British managers recruited 
along traditional lines often lack the technical know-how needed in 
highly competitive businesses. 

In the aftermath of the war, the granting of independence to India 
by the Labour Government in 1947 set in motion a process which ended 
with the dissolution of the British Empire. With the passing of the 
Empire, Bi'itish mauufactuT'ei-s were gi-adually deprived of the trad- 
ing advantages which had made it unnecessary for British merchants 
to sell their products aggressively. 

h. TnJiufficlcnt investment 

Failure to invest is another explanation for the TTnited Kingdom's 
sluggish performance. British investment as a percentage of gross 
domestic product (GDP) increased bv 0.1 percent from 1900 to 1905, 
8.2 percent from 1905 to 1970, and 1.8 percent from 1970 to 1973.^' 
In 1974, the Hudson Institute commented that "the ITnited Kingdom 
has now the lowest rate of capital investment per employee of any in- 
dustrial country.'' '''' A result has beeii <he slow rate at which Britain 
has l)een expanding its manufacturing. Between 1959 and 1907, the 
increase of British manufacturing output was 45 percent lower than 
that in other OECD countries."^^ 

An im])ortant factor in the low rate of Bi'ilish investment in 
private industry has been the increasing financial demands of the 
British welfare state. High taxes and large-scale ]Miblic sector borrow- 
ing required to pay for social services aiul T)nl)lic sector industrial and 
construction ])rograms have "crowded ou(" private ca]utal. 

c. The sf op-go economy 

Some obsei'vers attribute the low rate of British investment to the 
stop-go nature of British economic maiiagcMneut. Expansionary policy 
produced large trade deficits which were followed by stringent defla- 
tionarv measures to balance the T'nited Kiiiirdoin's external account 



^MTnrrod. l^oy Forbos. "Tlio British Economy." Now York. MrOrnw TTill. lOfi:? n. 2S 

™Thp Hudson InstltutP Europe. "The United Klnpdom In 19S0." New York-Toronto. 
John Wllev E. Sons. 1974, p. 22. 

'"Thld.. p. 22. 

■" ProHt, A. R. nnd D. J. Coppocks (Editors). "The U.K. Economy: A Manual of Applied 
EcoiioinlCK. London. Wcldonfcld nnd Nlcolson. sixth edition. 1070, p. l.T.'S. 



87 

and save the pound. A rostorod payments equilihriuni prei)ai(*<l thft 
way for renewed stimulation of the economy, which in turn rn-atcd 
deficits and the, pattern was repeated. It is not surprising that inves- 
tors were discoura<ied from puttiutj (heir money inlo enterprises which 
seemed bad i-isks in sucli a stop-i2:o (Mi\'ir()nnieut. Tlie Ifudson Instil iite 
has commented tliat the British preference for investin<r jihroad was 
liavin<r the result of leavinir "British industi-y outmoded and uncom- 
petitive; the economy dan^^erously vulnerable to political au'l eco- 
nomic uncertainty abroad." "^ 

d. The role of stei'ling 

One factor which played an im]:>ortant part in the l^ritish Ciovern- 
ment's stop-^ro policy was its determination to defend the value of the 
pound. In British official thinking special importance was driven to the 
role of sterling as in international reserve currency within the steiling 
area because this encouraged foreigners to keep deposits in London.^'-* 

In recent years receipts from banking, transport, insui-ance, tourism, 
and other services, as well as interest, profits, and dividends on invest- 
ments abroad have provided the United Kingdom with large invisible 
earnings. In the 1960's profits from the invisible account offset the 
British trade deficit ^° for 5 out of the 10 years. The soundness of the 
pound was believed to contribute to the encouragement of all these 
transactions. 

In order to preserve the standing of the pound as a reserve cur- 
rency British governnients often engaged in interventions in the in- 
ternational money market. The cost of this policy was heavy because 
the maintenance of an overvalued pound added to the difficulty of 
selling British goods abroad. 

e. Labor productivity 

The low productivity of British labor has been another major factor 
in the United Kingdom's poor economic performance. This was \i\idly 
illustrated by a recent report that in the auto industrv the British 
worker equipped with the same tools produces only half as mucli per 
shift as his continental counterpart. Studies show similar results in the 
chemical industry and generally across-the-board in industrv. The 
United Kingdom's great lag in worker productivity seems, however, as 
attributable to often inefficient and even indolent management men- 
tality as to union featherbedding and a pervasively Luddite mentality 
among workers.^^ 

/. British tradimg performance 

Owing to such factors British performance in the international 
market has steadily worsened. At a timiC when the volume of world 
trade in manufactured goods was expanding at the unprecedented 
rates of 7 to 10 percent annually the United Kingdom's share of world 
exports of manufactures dropped from 20.4 percent of world manu- 

^3 Hudson Institute, op. clt., p. 35. 

" Beckerman, Wilfred (Editor), "The Labour Government's Record 1964-1970," London, 
Duckworth, 1972, pp. 13-14. 

"* Hudson Institute, op. cit., p. 35. 

*^ Study Mission to Europe, November-December 1976. A report by Senator Jacob K. 
.Tavlts, to the Committee on Foreign Relations on his trip to France. Britain. Federal 
Republic of Germany, Belgium, Italy, and Yugoslavia, Nov. 18-Dec. 11. 1976. U.S. Govern- 
ment Printing Office, January 1977, Committee Print, 95th Cong., 1st sess., p. 3. 



88 

factured exports in 1954 to 17.7 percent in 1959, and then to 11.9 per- 
cent in 1967 and 8.8 percent in 1975.«2 

g. Political developments and economic events 

During the postwar period British political developments had a sig- 
nificant influence on the course which economic events followed. 

In the difficult early years after the war the Attlee government con- 
tinued many of the wartime restrictions such as rationing, curtailment 
of imports, and currency controls. The government took many steps 
toward socialization of British economic institutions, l)eginning with 
the establishment of a health service and the nationalization of the 
Bank of England in 1946. The coal mines were nationalized in 1946, 
the electrical and gas industries in 1947 and 1948 respectively, and the 
steel industry in 1951.^^ 

Labour governments expanded social ser^'ices, and added new na- 
tionalization programs. By fiscal year 1975-76 the ratio of tot^l ex- 
penditure (including interest and public sector investment) to GDP at 
factor cost was about 60 percent.®* 

h. Tlie Conservative govo^Tnents of 1053-6^ 

The Churchill government did away with wartime controls and in- 
troduced a policy of free trade. However, subsequent Conservative gOA- 
ernments followed a coui^e of stop-go economic policy in the defense of 
the pound. In 1957 the Macmillan govermnent rejected membership 
in the Common Market and thereby excluded the United Kingdom 
from the fastest growing continental trading system. It was an ex- 
ample of the United Kingdom's failure to shift to expanding markets. 
After the Macmillan government decided to negotiate for member- 
ship in 1961, the British demarche was blocked by De Gaulle's veto in 
1963. 

i. The Labour government 196i-70 

When the Labour government came to power in 1964 it expanded the 
number of nationalized industries and the scale of social services but it 
continued a deflationary policy to prevent an increased trade deficit, 
]:)laced a 15-percent surcharge on imports, and refused to devalue the 
pound — in this last respect following orthodox conservative policy.®^ 

Only in 1967, under hea\^ pressure on the pound, did the Govern- 
ment devalue sterling by 15 percent in the belief that this would stimu- 
late exports and combine a lower unemployment rate with a satis- 
factory balance in the current account.®^ 

Because of budget deficits in 1967 and 1968 the Government de- 
flated the economy by cutting spending and increasing taxes. By 
1970 Chancellor of the Exchequer Boy Jenkins had brought the budget 
into surplus. As a result of the devaluation and domestic deflation 
there were balance-of -payments surpluses in 1970 and 1971. 

;. The Conservative government of 1970-7 J^ 

The commo<lities boom of the early 1970's, which culminated in a 
five-fold rise of the cost of oil, sent commodity prices in world markets 



"- Prost, op. fit., p. 134. 

" St(H'l was denatlonnllzefl In 1953 and ronntlonallzcd in lOfiG. 

^ Public Kxpcnditiire 1970-80, London, Her Majesty's Stationery Office, 197C, Conind. 
r,:',9.i. p. R. 

•« nockerman, op. olt.. p. 19. 

'■« Hall. R. J. and T. Burns. "Tlio Inflationary Mechanism in the U.K. Economy." The 
.\merican Economic Review, vol 66, p. 477. 



89 

soaring. Higher prices abroad then drove up wages and (^t her domestic 
prices. This marked the beginning of serious inflation in the. United 
Kingdom which in 197;3 was already running at a rate of U/2 percent 
and increased to 15.9 percent in 1974 and 24.;i percent in 1975. 

In 1972 Conserv^ative Prime Minister Edward Heath attempted to 
deal with the problem of inflation by applying a mandatory system 
of price and wage controls. Wages were not to be increas^'d'by more 
than 7 percent per year. Prices were to be similarly fixed. I'iecauso 
prices were difficult to regulate— particularly impoit prices wliich 
were beyond the reach of British controls— many groui)s claimed hard- 
ships and inequities and asked for special treatment. 14ie strongest 
case was made by the coal miners, traditionally a militant group, whose 
bargaining position was enhanced by the energy crisis and the Arab oil 
embargo of late 1973 and 1974. The miners asked the Bntish Coal Co., 
the nationalized company, for a 30-percent pay raise, which the l^rime 
Minister refused. In the course of a production slowdown, then a strike 
from November 13, 1973 to early ]\Iarch 1974, British factories were cut 
back to a 3-day week. When miners refused an offer of a 13-percent 
increase. Heath dissolved Parliament in February 1974. Following 
an indecisive vote in the ensuing general election in which the Con- 
servatives retained only 296 seats in Parliament to Labour's 301, the 
Conservative government resigned and the conservative policy of man- 
datory wage ceilings collapsed. 

k. The present Labour government 

Shortly after taking office on March 4, 1974, the Labour govern- 
ment granted the miners their 30-percent wage increase, raised social 
security benefits and food subsidies, and increased taxes. Thereafter 
the Government was faced with the task of limiting wage inflation by 
voluntary agreement.^^ 

In September 1974 Chancellor of the Exchequer Denis Healey suc- 
ceeded in reaching agreement with Trade Unions Congress (TLTC) 
officials on a "social contract"' under which workers limited their 
pay raises to not more than £6 a week. It appeared to be an impor- 
tant turning point which indicated that labor leaders were coming 
to realize their interest in checking runaway inflation. The social con- 
tract was renewed with some changes in the two succeeding years. 

In the beginning of 1976, the British appeared to be pulling out of 
the 1975 depression. The economy was experiencing an annual growth 
rate of 5.6 percent but this was only t€mporar}^ The rate went down 
to 1.1 percent at midyear. In December 1976, the current account deficit 
was £1.9 million and the pound had declined 17.6 percent since Januarv'. 

By the end of 1976, the British Government was seeking massive 
loans from the International Monetary Fund, the Bank for Interna- 
tional Settlements, and on the Eurodollar market to provide a respite 
in which Britain could put its house in order. This course required 
furnishing proof to potential lenders of a rigorous program to 
strengthen the British economy. (For a discussion of British borrow- 
ing from 1972 to 1977 see pp. 23-25.) 

As part of this program the Chancellor of the Exchequer Healey 
reduced Government expenditure by about £2.5 billion for the fiscal 

87 Pellin.?, Henry, "A History of British Trade Unionism," London, Macmlllan, third 
edition, 1976, pp. 28&-291. 



90 

year 1977-78. These reductions included phasing out completely the 
subsidies to the nationalized electricity and gas industries and the Post 
Office. The Government promised to hold do^Yn the public sector bor- 
rowing requirement to £8.5 billion. However, the budget provided for 
increased expenditures for the expansion of investment and the reduc- 
tion of unemployment. As an additional source of financing, Healey 
sold some of the Government's share in British Petroleum, amounting 
to some £500 million. The Healey program was one which its archi- 
tects hoped would tide Britain over until the period when Xorth Sea oil 
was expected to provide Britain with all the oil it needs and additional 
income. 

On the basis of this program both the International Monetary Fund 
■and the Bank for International Settlements approved in January 1977 
loans for $3.9 billion and $3 billion, respectively, in response to British 
Government requests. However, the IMF loan was divided into two 
annual segments; the second segment was made contingent upon sat- 
isfactory performance during the first year. 

In 1977 the British Government has made great progress in dealing 
with some of the aspects of its economic crisis. OECD analysts expect 
that the British current account will show a small surphis by the end 
of 1977.^^ The United Kingdom expects to meet one-half of its daily 
petroleum requirements with North Sea oil by the end of December 
1977 and to be entirely self-supporting in oil some time in the fii-st half 
of 1978.^^ As a result of a stronger sales drive merchandising exports 
have been growing at a rapid pace, but OECD analysts forecast a level- 
ing olT in exports in 1978 owing to a decline in foreign demand. ^^ By 
October 1977 the inflation rate had come down to around 14 percent. 

These developments have impressed observers of the British econ- 
omy. For exami)le, at the IMF meeting in Wasliington in September, 
1977 the Managing Director of the Fund, Johannes Witteveen, paid 
tribute to the "really astounding" success of British policies adopted 
ovei" the past year to stabilize financial conditions. The decision of the 
British Government not to draw on the second portion of theT^H^^ $3.9 
billion loan seemed to confirm this assessment. ^^ 

Nonfinancial features of the economy, however, are troublosoTue. Un- 
employment remains high and may increase to 6.5 percent of the work 
force in the first half of 1978. GXP growth remains sluggish. A par- 
ticularly worrisome development is the growing reliK^tance of British 
labor to accept a loss of real wagas in order to reduce inflation. 

In July a vote of the Transport and General A"\'orkers I^nion reject- 
ing a motion to continue the social contract for another year raised a 
serious question regarding the Government's ability to prevent another 
wage explosion. The September annual general meeting of the TUC 
did not agree to renew the social contract but an understanding was 
reached with the Government that it would be TUC policy that a 
union should not press for increased wages until its current contract 
with management had been in force for a year. 

In early Xovember power workers, firemen, and miners all called 
for wages far above the 10 percent on pay increases wldc^li the Govern- 
ment was urging the unions to accept. Disieofanling tlic recommenda- 
tions of their national leadership, rank and file miners rejected a Gov- 

'*or:rD Kconomlc Outlook. July 1077. op. cit., p. 121. 
"■'Tho Wnsblncton Post. Oot. 27. 1077, p. IS. 
•"OFX'D. op. cit.. p. 121. 
" The Washington Post, Oct. 27, 1977. p. 1. 



91 

eminent offer of higher wages linked to increased productivity. Mili- 
tants are now threatening to strike unless they get a 90 percent raise. 
In doing so they are following the lead of extreme leftwing regional 
and local leadei-s such as Arthur Scargill, president of the Yorkshire 
Union, and ISIike INIcGahey, Communist leader of the Scottish miners. 
National coal mine union leaders are opposed to these demands, local 
mine unions are reportedly divided, and public opinion and other 
unions are less likely to give the miners support than they were in 
1974. On January 1:^, 19TS, the iireinen, who had been dcnianding a 30 
percent pay raise, ended their 9-day strike against the Government by 
accepting an otter of 10 percent (witli a pr()s})ect of further raises)."- 
The firmness of the Callaghan government in refusing to yield to pres- 
sure greatly increased its standing in the country at large. 

2. SELECTED INSTITUTIONAL FACTORS 

a. The managerial elms 

In the prewar United Kingdom business management was con- 
sidered a second-rate career. David Granick, who studied the charac- 
teristics of the British executive in 1962, w^rote : "The bnght young 
man of good fandly, 'public' school and Oxford or Cambridge, 
looks for his career elsewhere. The home service, the foreign ser\'ice, 
the independent professions such as law or medicine or even journal- 
ism, politics. " * * In the area of private enterprise other than the 
professions, only the 'gentlemanly businesses' of banking and publish- 
ing in the past have been considered truly respectable." '■^^ If upper 
class boys sought managerial jobs, it was generally because they had 
failed the civil service examinations or liad not made good in some 
more respected line of work. 

In the early and middle 19th century, when British industry was 
leading the world, managers often were technically grifted members 
of the lower middle or working classes and were promoted from 
the shop floor. Some top managers still come from nonelite groups 
with lower class backgrounds. But by the 1960's this became more 
difficult. With the virtual elimination of the Colonial Service and 
reduced openings in the civil service and the officer corps of the Army, 
Navy, and Air Force, a greater number of Oxford and Cambridge arts 
graduates and nonuniversity "public'' school graduates applied for 
jobs in industry. Granick found that as a result of the increased entry 
of university graduates and the fact that bright lower class boys could 
often get scholarships to good universities, there was a marked reduc- 
tion in the proportion of managers which came up through the ranks 
from a white collar or worker background.^* 

Observers of the British system consider the standard criteria which 
a company director uses in picking a manager to be similar to those 
used in selecting officers for the civil service. At least up to the late 
1960's the ideal candidate was the "amateur" — the gifted man of 
character who had been trained in the humanities and was unprepared 
for the work to which he would be assigned. He was considered able to 
take any job because he could exercise sound judgment and take a 
broad view of things. Applying civil service standards which had 
worked well for the admmistration of an empire, company directoi^s 

••-■ .\>\v York Times. Jan. 1.". 1978. 
»■* Granick. D^ivid. op. cit.. p. 97. 
e* TuiJ., p. 106. 



92 

often chose candidates who lacked any professional grasp of the tech- 
nical problems with which tliey would have to deal. Thus, the United 
Kingdom lagged behind its competitors in the application of scientific 
knowledge to industry. Even industrialists who employed scientists 
and technologists were seldom able to make full use of their talents.^^ 
David Granick noted in 1962 that "even in technical industries the 
number of scientists who reach board level are seriously restricted." ^^ 
The same situation exists in regard to business education. One stu- 
dent of British political economy has written : 

The anti-intellectualist bias of British society, together with the prejudice 
against vocational education in the universities, was mainly responsible for the 
United Kingdom's long delay in introducing a system of training for the liigher 
reaches of business comparable with that found among her commercial rivals.""" 

In the United Kingdom, industrial relations present problems for 
management. British society remains highly class conscious. It is dif- 
ficult for an upper-class man to deal without inhibitions with his em- 
ployees. The barriers to an easy relationship are even higher on the 
side of labor. Allen comments that : 

In Britain, management was for the most part slow in coming to terms with 
the new social temper. Many firms were not persuaded of the need for change ; 
for industrial relations were not a major preoccupation of management until 
trouble came. The author has the firm impression that differences among firms in 
the same industry in the success with which they deal w^th their labor problems 
may often be ascribed to managerial priorities ; firms where a senior director is 
in charge of industrial relations have been, so it seems, less prone to labor 
troubles than those where management is indifferent.*^ 

Allen also said : 

In a substantial part of industry, which is composed of small and medium 
sized firms, relations between employers and workers have probably been as har- 
monious as in any country, but in many of the large-scale industries, including 
those in the public sector, labor troubles have been endemic.™ 

In considering management a word should be said about the joint 
managerial role of British civil servants and industrialists regarding 
Government decisions. Examples of bad managerial decisions have 
been given by Professor Allen. He mentions the "muddle over the first 
version of the Trident, the abandonment of the TSK2 fighter, the 'huge 
waste of resources' involved in the decision to build Concorde, and the 
maladministration and indecisiveness in the development of atomic 
energy for civil use." ^°° He also implies that more technically versed 
officials would have decided against pouring money into decaying in- 
dustries such as Upper Cl3Tle shipbuilding, macliine tool firms, or the 
Chi-ysler plant at Dagenham, for political reasons or in order to 
save jobs. 

h. The trade unions 

The Ik-itish trade union movement traces its origins back into the 
18th centui-y when numerous groups of craftsmen and unskilled 
workers began to form organizations or "combinations'' to protect 

8« Allen, G. C, "The British Disease : A short essay on the nature and causes of the 
nation's laKKln^ wealth," London. The Institute of Economic Affairs, 1970, p. 49. 
^ Granick, op. cit., p. 243. 
»T Allen, G C, op. cit., p. 4r). 
" n>ld., p. 66, 
"« Ihld., p. 61. 
i'« Ibid., p. 22. 



93 

their interests in increasing wages, improving working conditions, and 
maintaining work standards. This spontaneous and unicguljitcd evo- 
lution resulted in the existence of 400 separate unions in 11)7;*) vai-ying 
in size from, the mammoth Transport and General Workei-s Union witli 
almost 2 million members to 232 small craft unions with under l.OOO 
members each.^^^ 

These individual unions conduct negotiations with management and 
call strikes. National unions negotiate national codective agreements 
wdth the appropriate national employers association. Local factoiy 
plant negotiations are conducted either by natic^nal union district of- 
ficers or, as is increasingly the case, by shop stewards cliosen by the 
employees in the place of work. 

The existence of many small, proud, independent, and often in- 
tensely jealous unions creates special problems. One union striking over 
a jurisdictional dispute can bring a large factory to a halt. For ex- 
ample, in November 1968, a stoppage of 22 operatives at the Girling 
brake factory led to the layoff of more than 5,000 workers in the motor 
industry.^°^ 

Unlike some other countries, the shop stewards and tlieir committees 
with their ojBfices on the factory premises have become a recognized part 
of the British system. Shop stewards are often organizers of unofficial 
strikes and are frequently more radical and aggressive in pushing 
their demands than central union officials. They have been particularly 
active in the motor industry since the late fifties and the loss of work- 
ing days in that industry has been seven or eight times the national 
average.^^^ 

In 1971, the Conservative government attempted to bring the con- 
duct of unions in industrial relations under stricter control. It intro- 
duced and passed over bitter Labour Party opposition an Industrial 
Relations Act which established a new court with jurisdiction in most 
industrial disputes. In addition to other powers, the court could im- 
pose a cooling off period and require a strike ballot in cases of major 
importance.^"* Collective agreements were to be legally binding ''and 
unions were expected to prevent the breach of agreements or to face 
prosecution through the new court." It also abridged labor's right to 
a closed shop. But the act was vigorously resisted by the trade unions, 
which were determined to prevent government interference in what 
they viewed as their affairs. They refused to recognize the jurisdiction 
of the new court. One of the first items on the agenda of the Labour 
Party when it returned to power in 1974 was to repeal the Industrial 
Relations Act and to restore labor's right to a closed shop. 

The apex of British trade union organization is the Trade Unions 
Congress. The Congress first met in 1867 and over the years it grad- 
ually developed into the central organization of British unions. It was 
at a special TUC conference in London in February 1900 that a Labour 
Representation Committee was founded which grew into the Labour 
Party.^"^ In the early 1900's. the Labour Party was "little more than 
the 'political arm' of "the Trade Union Congress." "^ 

101 Britain 1975: An Official Handbook, London, Her Majesty's Stationery Office: 1975. 
p. 347 and Wliittakers Almanac, 1977, p. 1114. 

102 Pellinff, op. clt., p. 275. 

103 Ibid., p. 249. 
10* Ibid,, p. 283. 
JOS Ibid., p. 115. 

108 Sampson, A., "Anatomy of Britain Today," New York, Harper & Row, 1965, p. 122. 

20-86G — 78 8 



94 

British unions fall into three general classes. The first consists of 
the unions covering a single industry. Examples are the national unions 
of mineworkers, railwaymen, and steelworkers. A second type is an 
amalgamated union combining a number of related unions, such as 
the Amalgamated Engineers, and the Shop, Distributive and Allied 
Workers. A third type is a union combining member unions with widely 
varyinor characteristics. Examples are the Transport and General 
Workers Union and the General and Municipal Workers Union. 

A British union dominating an entire key industry can paralyze the 
British economy as the coal miners demonstrated in the winter of 1973- 
74. It can also exercise an important influence in the British Trades 
Union Congress (TUC). 

Ill large trade unions power is usually highly centralized. A general 
secretary is elected for life. He is able to cast the votes of his union 
at meetings of the TUC as a single bloc. This often places a general 
secretary in a position to determine policy and to reverse longstanding 
positions. An example was the reversal of TUC policy toward defense 
in the mid-1950's. When Frank Cousins became general secretary 
of the Transport and General Workers Union in 1956, he challenged 
British defense policy by rejecting nuclear weapons and carried his 
position in the TUC by a vote of 3.282,000 to 3,239,000, mainly on the 
basis of the bloc of 1,373,500 votes which he controlled. For 3 years 
his challenge threatened to split the Labour Party but h\ 196*1 the 
mood changed and his motion was defeated 4.309,000 to 1.891,000.''^' 

Tlie TUC and its associated trade unions were and remain the chief 
financial contributors to the Labour Party. However, as Labour Mem- 
bers of Parliament increased in number they began to become more 
independent of the TUC. The Parliamentary Labour Party does not 
consider itself bound by the decisions of the TUC or the executive 
committee of the Labour Party on which the TUC is heavily repre- 
sented. This was demonstrated when the Labour government after 
Ions: equivocation agreed to entei* the P^uropean Coininiinity if British 
entrv was approved in a national referendum, a position which the 
TIT opposed. 

In view of the present state of the British economy, the TUC's 
support of governmental policy appears an essential ingredient for 
governmental success. The failure of the Heath government to force a 
maior union to back down in its wage demnnds led to a ijeneral election 
which the (Conservatives lost. The economic policy of the Lalwur gov- 
ernment under present conditions depends on the willingness of British 
unions to continue to accept some form of wage restraint. 

Communism was stronij in many Bi'itish trade unions at the end of 
World AVar IT. During the war, when the Communist Party was sup- 
porting the national coalition government. Communist Party members 
had won an increasing number of key positions in union hierarchies.^^** 
In a few unions Conununists gainc^l comj^lete control, such as the 
Electrical Trades TTnion, the Foundiy Workei-s. and the Fire Briirades 
T"nio]i. In r)thers. Communists had a snfficientlv sti'onof hold within 
<hc oflicialdom to threaten to take ovei- the whole nnion. In 1946 th(^ 



'"^ SnniiKon. op. olt.. p. 110. 
"« I'pllinfr. op. cit.. p. 2.*?2. 



93 

Amalgamated Knofiiieeiino- L^iiioii (AKl') had a stron«r Communist 
element among its oilicials and 1) memlx'i-s of the ;U>-man Executive 
Council of the Transport and (Jeneral Workers were avowed Commu- 
nists. But in succeeding years the position of the Connnunist leaders 
was greatly changed, l^articularly as a result of the Hungarian revolt 
of 1956, a third of the card-carrying Comrmmists throughout the 
country resigned.^^^ 

Recently Communist iniiuence has declined in the Amalgamated En- 
gineering Union where about 175 Connnunists had been in oflicial 
positions. Elections in November 19T5 produced a massive swing to 
The right, in effect a 5-2 majority for the modc^-ates. The Conmnmist 
Party never succeeded in gaining significant influence in the TUC. 
However, the "Yearbook on International Communist Affairs'- re- 
ported in 1976 that 15 out of the o6-man executive council of the 
Transport and General Workers Union followed the Communist 
Party line.^^° There have been recent press reports of greater activity 
on the part of the leftwing extremists in the Transport and General 
W^orkers, the Amalgamated Union of Engineering Workers, and Na- 
tional Union of Mineworkers. and of splits developing within the 
Trade Union Congress between the militants and the moderates. 

c. The civil service ^^^ 

The British civil service, now numbering roughly 700,000, is one of 
the earliest examples of a bureauci-acy recruited on the merit system. 
For more than a century the civil service has been noted for the intel- 
lectual caliber and integrity of its officers. Men slated for the top 
class — the Administrative Group — were recruited on the basis of high 
academic attainment and leadership qualities. But the increasingly 
complex and comprehensiA^e tasks of government in postwar England 
created a need for specialized knowledge, training, and aptitudes 
which the recruitment of upper class honors students chiefly trained 
in humanities and the classics failed to provide. 

The Fulton committee, appointed by the Labour government in 
1966, made several recommendations which led to a number of reforms 
of the civil service. It criticized the concept of the ideal administrator 
"still too often seen as the gifted layman who, moving frequently from 
job to job through the service, can take a practical view of any prob- 
lem." It also criticized the civil service for the narrowness of the back- 
grounds of the members of the Administrative Group. It found that 
the generalists in the administrative class were excluding scientists, 
engineers, and membeis of other specialist classes from higher man- 
agement and policymaking functions with the result that the British 
civil service was not developing a body of men "with the qualities of 
the French polytechnician — skilled in his craft, but skilled, too, as an 
administrator."' ^^- 

The Labour Government did not accept all of the Fulton report's 
recommendations, but a number of modernizing reforms were made. 
For example, the civil service has put great emphasis on in-service 
ti-aining and has broadened the basis of its recruitments 



96 

Although there have been numerous changes in the British civil 
service in recent years, many of the characteristics of the old system 
remain. The membership is more democratic but the majority of of- 
ficers are still the products of Oxford and Cambridge — though some 
of these are scholarship men. In 1965, three-fourths of the Admin- 
istrative Group entrants came from Oxford or Cambridge. By 1970, 
the figure had dropped to 55 percent. 

Long established traditions have trained the British civil servants 
to provide the experience, know-how, and continuity needed for the 
smooth administration of tlie country when a govermnent changes. 
They are exr)ected to assist in the implementation of new policies in 
the most efficient and least disruptive way possible. 

Particularly since AYorld War II, the British Government has taken 
on many new responsibilities, resulting from the nationalization of a 
number of industries, the establishment of a national health service, 
and the expansion of defense production and scientific research activi- 
ties. As has been noted above, this has caused the British civil service 
to introduce many changes and thus demonstrate an ability to adapt 
to new circumstances. 

Some critics question the judgment and independence of civil serv- 
ants. Some, for example, charge the officials of the Treasury with be- 
ing too firmly embued with the teachings of Keynes and too commit- 
ted to the interests of British finauciers. But few questions the caliber 
of their intellect or the incorruptibilitv of their administration. 

The staffs which run the nationalized industries are not part of the 
British civil service. Nationalized industries in Britain are public cor- 
porations subject to ministerial control in varying degrees. The re- 
sponsible minister chooses (and may dismiss) the chairman of the 
board and may give directions as to how the industry should be run 
but he does not interfere in day-to-day management. The public cor- 
porations are expected to be commercial enterprises in the normal 
sense. 

d. Oovpmm/'ntal sfahility 

Recently a significant change has occurred in the structure of British 
politics. This change may have profound effects on the stability and 
authority of British governments. 

Traditionally, an outstanding characteristic of British parlia- 
mentary politics has been the dominance of two large parties which 
succeeded one another in power without resorting to the formation of 
a coalition. All but 6 of the 25 elections since the 1884 Reform Act 
produced a one-party legislative majority.^^^ A Prime Minister not 
dependent on a coalition partner is in a strong position to govern 
decisively. 

Two developments have now made it difficult for one party to com- 
mand a parliamentary majority : the close balance in the parliamentary 
seats of the Labour and Conservative Parties and the growth of small 
parties. At the present time the Labour Party has 308 seats in the 
House of Commons to the Conservative Party's 281. In recent years 
there has been an increase in the number of small regional and special 
interest parties.^^* Counting in the Liberal Party's 13 seats, the small 



'" Lnver. Mlchnol, "Conlltions In Britain," Parlinniontnry Affairs, vol. XXX, No. 1, 
wlntor 1977, p. 107. 

"♦ In tho ppnornl rloctlon of 1074 the Scottish Nationalists won 11 seats, the Plaid 
Cymru (WolHh Nationalists) 3. the United Ulster Unionist Council 10, the Social Demo- 
crats, the Social Democrat and I^abour Party, and an Independent one each. 



parties now contiol 40 out of i\u\ (hV) votes in tli(^ House of Comnion-. 
And the close balance between the two major parties ^ive« the small 
parties an unexpected importance. 

One observer of Britisli politics believes that tlie pre^sent situation 
of major parties without majorities and minor partie.s on the rise 
cannot be dismissed as a passing phenomenon. Jle writes: 

The decline in support for the major parties can * * * be monitored over nearly 
two decades. There is overwhelming survey evidence that the incidence and In- 
tensity of party identification is weakening in all age groups and all social 
classes. Even if the Liberal Party should be reduced at the next election (as it 
generally is after periods of Labour government), there is no reason to 8ui>i>o8e 
the Scottish or Welsh representation will be less fragmented, or that any Ulster 
MP will owe allegiance to either of the main parties. The chances of either main 
l>arty gaining a working majority — the prerequisite for the functioning of re- 
sponsible party government — are not more than fifty-fifty. Tlie chances of either 
of the main parties becoming more cohesive, less troubled by ideologues on the 
flanks and pressures from constituencies and conferences, are a good deal less 
than fifty-fifty. It looks as though the character of parties, and therefore the 
role of the party in our system of government, is undergoing at least a medium- 
term change."^ 

The shrinking of support for the major parties and the rise of 
small parties have been attributed in part, to the discouraging record 
of both the Labour and Conservative Parties in dealing with economic, 
political, and international problems. Frustration and disillusion tend 
to narrow the range of political interest and to strengthen the in- 
clination to vote for the opposition. 

A recent event occurred which clearly revealed the weakness of the 
current Labour government. By the fall of 1977 the narrow majority 
of two which the Labour Party won in the election of October 1974 
had been reduced in by-elections to minus 7. On ^larch 2-3, 1977, tlie 
House of Commons acted on a vote of no confidence resolution intro- 
duced by the Conservative opposition. The Labour government de- 
feated the motion by a vote of 322 to 298 only because the leader of the 
Liberal Party, David Steele, promised Prime Minister Callaghan that 
the members of his party would support the Government during the 
rest of the 1976-77 parliamentary session. (The Liberals have^an- 
nounced their decision to continue this arrangement in the 1977-78 
session.) In return Callaghan agreed that the Liberals would be con- 
sulted before any Government policies reached the House of Com- 
mons and that they would have a chance to air their views. Then each 
side would be free to vote as it wished. This arrangement did not 
constitute a coalition; no liberal MP entered the cabinet. But it re- 
mains in the power of the Liberals to save or bring down the Labour 
government. 

There are also other sources of weakness in the current Labour gov- 
ernment. The 80 or so members of the Tribune group, the leftwing 
radicals, are uneasy about what they consider as unacceptable conces- 
sions which Calladian has made to international bankers, the Interna- 
tional Monetary Fund, the West Germans, and the Americans. :Nrany 
members of the group are ideologues and on some issues, like British 
entry into the Common Market, are capable of abstaining or voting 
against the Government. 

"•Tulzer Peter "Will England Love Coalitions?" Parliamentary Affairs, vol. XXX, 
No. 1, winter 1977, p. 77. 



98 

Thus, there is at least a theoretical chance that the Callaghan gov- 
ernment may lose a crucial vote and be forced to resign because its 
])osition on a given issue is unacceptable to the Liberals or to a suffi- 
cient number of far left Labour members. 

This possibility was brought closer in June 1977 when the Labour 
Party split over legislation to establish the terms under which British 
members of a European parliament were to be directly elected. Prime 
[Minister Callaghan was unable to deliver on a promise to his European 
Community colleagues to enact such legislation until the beginning 
of the new 1977-78 parliamentarj^ session. He was also forced to post- 
X^one legislation providing for limited self-government for Scotland 
and Wales. 

e. The economic philosophies of Jcey political parties 

Some observers of the British political system have concluded that 
the economic policies of the British Conservative and Labour Parties 
when in power are not all that different.^^^ Except for those on the 
extreme wings, members of both parties hold many views in common. 

Many Conservatives and Labourities are disciples of Keynes and 
accept the need for government regulation of the economy by con- 
trolling demand through various fiscal and monetary means. For ex- 
ample. Prime Minister Harold Wilson generally employed the same 
methods the Conservatives had used in dealing with balance of pay- 
ment problems. 

The Conservative Party, like the Labour Party, has accepted fuH 
employment as a central economic objective. Both stand for economic 
growth and the maintonanr»o of balanced external payments. In 1064 
some leftwing Labour Party members recommended that the La- 
bour government should stimulate the economy despite the advei*se 
consequences for the balance of payments so that British industry 
could expand and make itself competitive. But in fact the Labour gov- 
ernment deflated in 1964-65 in order to bring the trade account into 
balance. 

The same was generally true regarding devaluation. The Labour 
government devalued the pound in 1949 and 1967, but it was reluctant 
to do so. When Harold Wilson came to power in 1964 he turned down 
recommendations of devaluation. It was only serious deterioration of 
the British trade balance and heavy pressure on the pound in 1967 that 
made him change his mind. 

Even in the field of state planning there is less difference between the 
two parties than might be expected. In the 1950's the Conservatives 
under Churchill and Eden had been contemptuous of French economic 
planning. But by the early 1960's the Conservatives under Macmillan 
became interested in the French example. The Conservative crovem- 
ment set up the first planning office in Britain in 1962, the National 
Economic Development Council (the so-called Neddy). '\Ylien the 
Labour Party came into power it established a Department of Eco- 
nomic Affairs, which was to plan economic development for the long 
run.^^^ Its role was to be more extensive than the Conservatives' Coun- 
cil. But for various reasons the new Department did not succeed in 



"«I?rltfnn. Sninurl, "T.oft or Riu'lit. tlio T?op:iiR DUcmiTift," London, Srcknr & Warburff, 
1908. p. 11. 

"'PelllnR, op. cW., p. 207. 



99 

overshadowing the Treasury as the top economic (lopnrtmrnt in tlio 
Government. 

Even in the case of price and wa<i:e controls tliore was no hasic, dis- 
agreement about objectives between the two parties tlion<_di there was 
about methods. When wages had begun to climb in the ejirly 19(')()\s, the 
Conservative Chancellor of the Exchequer Selwyn Lloyd introduced 
a pay pause which the trade unions resisted. When in power, Lal)our 
set up a National Board for Prices and Incomes in 1904. Faced with an 
acute sterling crisis in 1966, Wilson imposed a 6-month wage freeze 
"all too reminiscent of Selwyn Lloyd's 'pay pause' of 5 years 
earlier." f^^ The attempt to control wages continued through Conserva- 
tive Prime Minister Heath's unsuccessful attemj)t to limit tlie (•r)al 
miners' wage demands, the social contract policy of the Laboui- Gov- 
ernment and its present efforts to prevent a new round of exoil>itant 
^vage claims. 

The strongest differences occur between the parties' economic 
philosophies regarding questions of egalitarianism. The Labour Party 
believes strongly in expanding social services. They press for the elimi- 
nation of private beds in state-supported hospitals. They wish to end 
State support for private schools and universities and promote egali- 
tarian pulDlicly financed high schools to which students are admitted 
irrespective of their intellectual standing. They would end the P>ritish 
grammar schools — free schools reserved for the bright child — which 
iiave played an important part in bringing gifted ]neni])ers of the 
lower classes into the top ranks of the British meritocracy. Tlie Con- 
servatives believe in separating the bright from the less gifted children 
by the so-called 11-plus examinations and sending the bright ones to 
special schools. They also believe in State support of "public" schools 
and universities through a Government grants program. 

In contrast to the views of Conservative and Labour moderates, 
there are strong differences of opinion betw^een the extreme wrings of 
the Conservative and Labour Parties. And under the pressures and 
frustrations of current Britivsh politics, the possibilities of the more 
extreme elements gaining control cannot be ruled out. 

The Tribune Group in the Parliamentary Labour Party presently 
consists of some 80 MP's. Their views vary considerably but they gen- 
erally share a belief in greatly extending the nationalization program, 
at least far enou,2:h to control "the commandinir heights" of the 
economy. It was their influence which led to writing into the party 
platform the provisions for the nationalization of banks,^ aircraft, 
guided missiles, shipbuilding and repairing, and marine engine build- 
ing industries. They favor heavy taxation of the rich. They are pre- 
pared to deal with balance of payments problems by restricting 
imports and limiting the export of currency and investments. 

This group is the inheritor of the Little England tradition — the 
tradition of building "Jerusalem in England's green and pleasant 
land." It opposed British entry into the Common Market. Its overall 
aim is to build socialism in the United Kingdom and eliminate tlie 
specific privilesres of inherited w^ealth as nuickly as possible. Its views 
are widely supported in labor union circles. In recent years, the con- 
nections between the Tribune Group and the extreme left wing of the 
trade union movement have become increasingly close. 



"8 Ibid., p. 270. 



100 

On the Conservative side the ri^htwing group typified by Sir Keith 
Joseph is made up of followers of free market economists like the 
American Milton Friedman. They believe that it will be impossible to 
end British inflation, which is crippling the oconom 3% unless unemploy- 
ment is allowed to rise to its natural economic level. They favor greater 
tax breaks for industn^^ to stimulate the economy. They would like to 
end the featherbedding in many industries. If the Conservatives 
should win the next election it is not clear how closely the party leader 
Margaret Thatcher would adhere to free market ideas which she has 
espoused in the past. But if the Conservatives come to power the pos- 
sibility of serious conflict between the government and the trade unions 
cannot be ruled out. 



V. IMPLICATIONS* 

A series of scenarios hypothesizing how events might evolve in the 
United Kingdom, Italy, and France may serve to illustrate the possi- 
ble implications for the United States of sudden changes in these three 
countries. These scenarios should not be viewed as forecasts. Without 
taking account of probabilities, they present some descriptions which 
may be far from reality. They were designed to illustrate the types of 
situations which, if they should occur, might directly concern the 
United States and to which we might have to react. 

Since the situations from which these scenarios take off are different 
in important respects, the scenarios are presented on a country-by- 
country basis. 

A. United Kingdom 

Problems in the United Kingdom arise from long-standing economic 
conditions; what political instability exists is primarily generated by 
economic and social flaw^s. If the economy is put in good running order, 
political problems should diminish greatly. 

A basic economic problem in the United Kingdom is the structural 
inflexibility of the economy. A large part of its investment and its 
labor force is committed to old-line industries such as shipbuilding, 
steel, and coal mining, all of which are no longer competitive. Yet clos- 
ing them down would result in large-scale unemployment. In the long 
run economic viability will require a substantial restructuring of the 
economy. This will be a slow process and require the training of men 
and women for new types of work, often at new locations. The hope 
of British planners is that the necessary structural changes can be 
achieved during the breathing spell which North Sea oil provides. It is 
against this backgi'ound that the scenarios sketched below should be 
considered. 

1. A first sce7mrio envisages that the flow of Xorth Sea oil gives Brit- 
ain the additional resources to provide it with the breathing space it 
needs. Freed from the drain of oil imports, British external accounts 
are balanced and the government in power is able to reflate the econ- 
omy, encouraging investment in promising industries and give its ap- 
proval to reasonable increases in wages which compensate for the loss 
of real wages suffered in the last 2 or 3 years. The progress made in the 
last year continues and justifies the renewed confidence shown by 
the British stock market recently. Economic expansion reduces 
unemployment. 

In such circumstances the United Kingdom finds sufficient resources 
to meet its NATO commitments and the Government is not forced to 



♦This section ws)s written by Edward T. Lampson. 

(101) 



102 

adopt protectionist measures. An uneasy political balance between the 
Conservative and Labour Parties continues but the centrists in both 
parties remain in control. '\"\niichever party wins the next parliamen- 
tary election follows roughly the same economic policies thouofh there 
may be widely differino^ approaches to social policy. If a strono: recov- 
ery occurs in other countries, this should increase the forei^ demand 
for British oroods. Under continued ofovemment guidance, investment 
in potentially profitable industry increases. In such circumstances 
British self-confidence begins to return. 

It should be emphasized here that, as of the present time, in spite of 
Xorth Sea oil and growing foreign exchange reserves, the Ignited 
Kingdom continues to exhibit severe unemployment and sluggish real 
GXP growth. 

•2. An nlfprixofvre scenario suggests the following more pessimistic 
picture. The failure of the international economy to expand deprives 
the United Kingdom of the stimulus of increased foreign demand. 
TTest Germany and Japan in particular continue to refuse to reflate 
out of fear of inflation. The estimates of the proceeds from Xorth Sea 
oil prove to be exaggerated and the debt servicing of capital invest- 
ment for oil development underestimated. Failure to brinof down the 
British inflation rate ends any chance of continuing the labor unions' 
willingness to accept substantial losses in real wages. A ncAv wave of 
wacre claims results either in a wage explosion which sets off a new 
inflationary spiral or a series of prolonged strikes. Loss of confidence 
produces a flight of capital and a run on the pound, together with a 
mountincr balance of payments deficit. Undf^r these circumstances, the 
balance of power in both the Labour and Conservative Parties shifts 
to the extreme wings of these parties. Xo mntter whether Labour or 
the Conservatives wins the next election, British policy rests in the 
hands of less moderate elements. There are strong pressures for pro- 
tectionist measures. There is also strong pressure to cut the British 
defense budget to the bone, including the withdrawal of the British 
Army of the Rhine (BOAR) from the Continent. 

Suoh a scenario has serious implications for the United States. The 
withdrawal of British troops from the Continent would create grave 
problem.s. It would require a thorough review of XATO strateiry'. An 
essential balance wheel in the organization would be weakened, thus 
tending to reduce XATO to what the smaller members woidd resent as 
essentially a bilateral L'nited States- West German alliance with 
appendages. 

A move by the United Kingdom towai'd extreme protectionism 
would also create gi-ave problems. It would diminish constructive 
Bi'itish influence in international financial and trade organizations 
and ieopardi7e the ongoing GATT negotiations. It would eliminate 
the United Kingdom as an effective participating member of the Euro- 
pean Community and as a pai*tner in working out plans for reconciling 
Xorth-South confrontations. And lastly, its protectionism would 9o\ in 
motion a series of I'etaliatorv actions by other countries which would 
be a serious setback to international free trade. 

At a time when further international assistance might moderate 
some of the pressures which might push the United Kingdom in these 
directions, British creditworthiness in the eves of international bankers 



103 

would bo coinproinisod. T]\o opportiiiiitios for tlie IJnitcf] Sfntcs to 
help would he liniitod. Under this scenario perliaps the best policies to 
follow in the short run would be to continue present courses of action 
which may prevent a British slide into extremist actions, such as dis- 
coura^xin^^ protectionism in the United States and abroad and en^our- 
a<yino- tJie reflation of the major industrial powers as far as possible in 
order to stinndate the foreiern demand which the United Kinfrdom 
needs to help balance its external accounts. 

B. Italy 

Italy possesses economic characteristics which differ widely from 
those of the United Kingdom. Its industrial structure appears to be 
much more flexible. More recent in origin, its production patterns are 
less firmly entrenched in increasingly outmoded types of heavy indus- 
try. Its business community shows a greater facility in adjusting to 
changing requirements and tastes. The remarkable Italian ability to 
stage economic comebacks can be explained partly by this flexibility. 
On the other hand, Italy's economic dualism is a grave handicap which 
is expensive and difficult to correct. Its import dependence, especially 
in energy, makes it the most vulnei'able of the three to the impact of 
adverse economic developments abroad. In addition, politics plays a 
more crucial role than in the United Kingdom. 

The success of the Andreotti government in strengthening Italy's 
financial position gives some plausibility to an optimistic scenario for 
the short-term Italian future. Italy is presently paying for tlie auster- 
ity program, which has resulted in its improved financial position, by 
a slowdown in production and continued very high unemployment. 
But some relaxation to give needed stimulation should be possible — 
especially in view of the confidence which the Andreotti government 
has created in financial circles abroad. 

1. A first scenario envisages a moderate reflation. Increased respon- 
sibility shown by Italian labor leaders prevents a renewal of devastat- 
ing wage explosions. The Communists continue to follow their stabiliz- 
ing policy by calling for responsible labor action, an improvement in 
working and living conditions, a halt on demands for more nationaliza- 
tion, more productive investment, an overhaul of Government machin- 
ery, elimination of corruption, and reform of unprofitable state indus- 
tries. In view of their record, there is no serious flight of capital even 
if the PCI joins the Government. For the near future at least, the 
United States can count on being able to continue to use the naval and 
air facilities which Italy is providing NATO. 

2. Another scenario hypothesizes that the relatively favorable eco- 
nomic position of Italy is too fragile to last unless there is a w^orld 
boom. Lacking the British windfall of the North Sea oil and the 
French progress in providing for extensive production of energy in 
nuclear and hydroelectric power plants, Italy's oil bills and debt serv- 
ice payments continue to be heavy burdens which it is unable to carry 
without continued outside financial assistance. The corrective auster- 
ity measures applied by the Andreotti government ])roduce a domestic 
recession comparable to the recession of 1964-65. This recession has 
grave political repercussions. It forces the resignation of the Andreotti 



104 

ofovernment and the ensuing elections produces the first Communist 
plurality in the Italian history. The majority is large enough to per- 
mit Berlinguer to form a cabinet in which Communists occupy key 
ministries such as foreign affaire, defense, economics, and finance"] This 
in turn produces a serious flight of Italian capital despite drastic 
measures to prevent it. Foreign investors draw out funds and some 
foreign plants in Italy are closed down. There is a run on the lira. 
The economic situation heightens the violence and crime which has 
been plaguing Italy in the recent past. The Government is driven to 
take protectionist moves and antiforeign attitudes intensify. The 
Communists under pressure from militant members alter their course 
and veer in the direction of a radical reorganization of society. In such 
a situation the reliability of U.S. base rights in Italy becomes ques- 
tionable. The Italian role in the EC diminishes as its protectionist 
measures bring it into conflict with other EC members. 

One of the questions which the United States may have to face 
is the degi^ee to which it should come to the aid of Italy in case of 
serious economic difRculty. Given the nature of Italian politics at the 
present time, any U.S. involvement inevitably will require some resolu- 
tion of the question of whether to deal with the PCI either as an 
influential participant in the formation of Government policy or as an 
actual member of an Italian government. 

C. France 

In view of the character of the French economic and political situa- 
tion, the French scenarios are cast primarily in political terms be- 
cause it appears that significant changes in the French economy are 
more likely to result from political rather than economic events, at 
least for the near future. 

In the uncertain situation in France, where bitter disputes are 
going on between the three members of the Union of the Left, it is 
possible to contemplate at least four possible scenarios. 

1. A first scenario posits the failure of the Union of the Left to 
win the March 1978 election. This leaves President Giscard in a posi- 
tion to choose a centrist prime minister, although Gaullist leader Chirac 
exerts strong pressure to acquire the post for himelf. In the post- 
election situation Giscard might decide that he has to follow a more 
Gaullist line in order to maintain Gaullist support in the National 
Assembly. If so, he might reverse the small moves he has made in 
instructing the French General Staff to aline French strategy more 
closely with that of NATO. He might play a less cooperative role 
in international economic institutions. On the other hand, he might 
find it possible to win enough support from Socialists and Left Radi- 
cals on an enduring basis to govern effectively without Gaullist sup- 
port. In this event he might push through economic reform programs 
such as an increase in capital gains taxes and participation of labor 
in factory management. In any case, P^rench economic policy would 
probably not change greatly and the health of the French economy 
would depend chiefly on the health of the other industrial nations and 
of the international community at large. 

2. A second scenario envisages a victory of the Union of the Left 
iu the March 1978 elections. In view of the difficult economic problems 



105 

which the new government faces, the Comnumists, who would prob- 
ably have only six or seven of the less important portfolios, begin by 
keeping a low profile and allowing Socialist leader Fran(;ois Mitterrand 
to assume responsibility for overall Government policy. The left-wing 
government starts by following a gradualist course and policy changes 
more in tone than in substance because Mitterrand takes into account 
the constraints which economic interdependence imposes on French 
policy. He does not overlook the impact which a massive flight of capi- 
tal or a precipitous fall in the value of the franc w^ould have on the 
French economy. The entry of the Communists into a French govern- 
ment may have less serious implications for NATO than the entry of 
the Italian Communist Party into an Italian government because Italy 
is a more active and important partner in NATO today. (If the 
Mitterrand government halts the increasing coordination of French 
strateg;v with NATO strategy, this Avould only be a return to the poli- 
cies of the De Gaulle period.) Because the Socialist Party has a pacifist 
strain, and the Communists a pro-Soviet strain, the new government 
may cut the French defense budget and pull French troops out of 
West Germany.^ After the first few months, the PCF attempts to force 
the Government to make deep cuts in the French contribution to 
Western defense and to expand its intervention in the economy but 
fails to achieve significant changes in government policy. 

3. A third scenario envisages the French Communists in power con- 
tinuing the aggressive behavior they have shown in the negotiations 
for a revised version of the Common Program of the Union of the 
Left. Strong pressure from the militants in the PCF forces Socialist 
leader Mitterrand to accept widespread nationalization. (In view of 
the fact that the Socialists are much stronger than the Communists in 
popular support, there may be a limit to the pressure which French 
Communists' leader Georges Marchais can apply successfully.) As a 
result of extensive nationalizations a massive flight of capital occurs, 
the franc plunges, and a severe economic crisis results, leading to 
political violence. 

4. A fourth scenario hypothesizes that a Socialist-Communist coali- 
tion proves to be an unstable political combination. Communist hard- 
liners become more and more concerned that the Marchais policy of 
collaboration is causing the party to lose its identity and betray its 
mission as the vanguard of the working class. This pressure forces the 
Communist Party leadership to pull the party out of the coalition and 
assmne an aggressive oppositional role. On their side the Socialists find 
their policy differences with the Communists becoming so strong that 
they prefer to dissolve the coalition and reconstitute a government 
along Socialist-Center lines. 

D. Repercussions in Europe 

If the worst case scenarios prevail, all Europe would be affected, 
particularly the European Community. The vulnerability of that or- 
ganization has already been shown by the impact of the 1974-75 reces- 

1 Mitterrand, however, is reportedly deeply concerned by the Soviet conventional build- 
up in Eastern Europe and believes that the Atlantic Alliance is indispensable until a 
dependable overall European settlement is reached. Thus he may continue to maintain 
French conventional defense forces and a relationship with NATO. 



106 

sion on its operations. At that time the conditions and policies of 
member countries became so divergent that it was impossible to carry 
out plans for moving toward a monetary union. 

E. COXCLUSION 

As emphasized above, all three countries require exports to pay for 
their essential imports. Slack demand among their customers, chiefly 
other industrial states, therefore would tend to push their economies 
in the direction of the more pessimistic scenarios with unfortunate 
implications for the United States. If this occurs, the rise of protec- 
tionism, the weakening of the Atlantic Alliance, the breakdown of 
international cooperation in the management of financial affairs, re- 
duced chances for the improvement of North-South relations, the in- 
crease of Communist influence in Europe, and growing neutralist 
sentiment will become more likely. 

If the United States is to be in a position to reverse such a trend, 
it will have to examine beforehand the range of measures to make 
available additional financial assistance, if needed. The performance 
in the recent past of several instrumentalities for balance-of-payments 
financing provides an excellent starting point. The actions of the Bank 
for International Settlements, the International Monetary Fund, tlie 
European Community, private Euromarkets, and central banks in 
providing large-scale balance-of-payments financing were extraordi- 
nary. Their roles, for the most part, have gone unnoticed. How these 
diverse sources of funds could be used in the future, if needed, should 
be examined closelv. 

o 



UNIVERSITY OF FLORIDA 



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